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2016 Capitalization Rate Study
```2016
Capitalization Rate Study
State-Assessed Properties Division
John K. Thompson, Chief
Lien Date 2016
____________________________________________________________________________________________________________
SEN. GEORGE RUNNER (Ret.)
FIONA MA, CPA
JEROME E. HORTON
DIANE L. HARKEY
BETTY T. YEE
CYNTHIA BRIDGES
First District
Second District
Third District
Fourth District
State Controller
Executive Director
Lancaster
San Francisco
Los Angeles County
Orange County
__________________________________________________________________________________________________________________________________________________________________________________________________
BOARD MEMBERS
CALIFORNIA STATE BOARD OF EQUALIZATION
Executive Summary
“The income approach to value includes any method of converting an income stream into a present value estimate (i.e., an indicator of current fair
market value). The income approach is also called the capitalization approach because capitalization is the process of converting an expected
income into an indicator of value.
The methods or techniques used in the income approach may be relatively simple (e.g., income or rent multipliers and direct capitalization), or
more complex (e.g., various yield capitalization techniques). All of these methods are referred to as capitalization techniques because they convert
an expected future income stream into a present value estimate.
The income approach requires careful application because small variations in its key variables (capitalization rate, duration of income stream,
estimated income and expenses, etc.) will be mathematically leveraged into a wide range of estimated value. This is particularly true for the
capitalization rate variable. The reliability of the income approach is no greater than the validity of the assumptions used to estimate the key
variables. The mathematical techniques used in the approach, while sometimes complicated, are merely tools for converting these assumptions
into an estimate of current market value.” 1
I.
Authority for Capitalization Rate Study
Property Tax Rule 8 (g) (2) provides the authority for the method in which the capitalization rates were developed in this study. The rule
states “the capitalization rate may be developed…
By deriving a weighted average of the capitalization rates for debt and for equity capital appropriate to the California money markets
(the band-of-investment method) and adding increments for expenses that are excluded from outgo because they are based on the value
that is being sought or the income that is being capitalized. The appraiser shall weight the rates for debt and equity capital by the
respective amounts of such capital he deems most likely to be employed by prospective purchasers.”
II.
Band of Investment Approach
In its simplest form, the band of investment method assumes that a purchaser would pay cash (or equity) for a portion of the property and
would borrow the balance of the purchase price. For example:
Debt
30% x Cost of Debt
7% =
Equity 70% x Cost of Equity 12% =
Weighted Average Cost of Capital
1
2.1%
8.4%
10.5%
Assessors’ Handbook 501, Basic Appraisal, Revised January 2002
i
Executive Summary
This booklet contains a study for each of the major state assessee industry groups 2 in California. Industry data was compiled by groups
with similar Value Line financial ratings. Local exchange, wireless and interexchange industries have been combined into one
telecommunications study.
Generally accepted procedures were used to estimate the cost of capital for debt and equity. The long term debt cost is the cost for a
particular risk class of debt on the lien date. The equity rate reflects the rate of return or compensation that will satisfy the risk that a
prospective purchaser would anticipate if a property purchase decision was made. The rates chosen are the result of analysis of economic
conditions and financial data listed in the supporting schedules and are the product of the staff’s informed judgment.
The rates derived in this study are basic capitalization (or discount) rates that represent the after-tax return on investment only. Any
increments required to be added by Property Tax Rule 8(g)(2), such as income or ad valorem tax components, are in addition to the rates
listed.
A.
Capital Structure - Prospective Purchaser vs. Company Specific
State assessees often ask why the Board does not use the current capital structure of individual companies in the band-ofinvestment method. As explained in Rule 8 (g)(2), the appraiser shall weight the rates of debt and equity capital by the respective
amounts of such capital deemed most likely to be employed by a prospective purchaser.
Therefore, the capital structure contemplated is a representative or typical structure of an industry group of companies with a
similar bond rating, not that of the present owner. The objective of doing so is to strike an optimum capital structure from the
perspective of a potential investor.
B.
Company Specific Debt Rates
In many cases the debt component of the capital structure for a prospective purchaser and the individual company being assessed
may be similar. In cases where, in the judgement of staff, the debt ratings of the individual companies being assessed and the debt
ratings of prospective purchasers are similar, the company-specific bond rating has been used to develop the appropriate debt
component of the recommended capitalization rate. In cases where rate-base regulated companies have embedded debt with rates
higher than the market rates at the lien date, a revenue adjustment may be indicated in order to match the revenue expected by a
prospective purchaser if the purhaser’s revenue would be determined by those market rates.
2
Gas, Electric & Water; Natural Gas Transmission; Electric Generation; Telecommunications (Local Exchange, Interexchange, Wireless); Pipeline; Railroad
ii
Executive Summary
C.
Impact of Holding Companies on Determination of Capital Structure
Many of the larger state assessees are subsidiaries of their holding company. Stock purchases related to a subsidiary must be
made through the parent holding company. Since there is no direct market data for state assessees that are subsidiaries of a
holding company, staff must rely, in great part, upon market data related to the holding company.
III.
Capital Asset Pricing Model
The Capital Asset Pricing Model (CAPM) is a widely accepted theory used to estimate the cost of equity capital. In the application of
CAPM, the most sensitive component affecting the outcome is the estimate of the beta3 coefficient. The choice of different time frames
and frequencies of measurement in the calculation of the beta can produce significantly different results. Another factor in the use of beta
is the choice of whether to use an unadjusted beta or a beta adjusted to reflect the fact that betas tend to revert to the mean over time. In
this study, three betas were obtained from separate sources: one adjusted (Value Line) and two unadjusted. Generally the betas from the
three sources are averaged to establish the beta used to estimate the cost of equity capital for a specific industry. However, the average
beta for highly regulated industries, such as gas or electric transmission and distribution, tend to understate the risk inherent in those
securities. Accordingly, for companies in highly regulated environments, the Value Line adjusted beta was chosen as a better estimate of
the relative risk in the calculation of the required equity return.
IV.
Flotation Costs
When new issues of both debt and equity capital are sold to investors, the issuing company incurs transaction costs such as underwriting
fees, legal expenses, and prospectus preparation costs. These costs of issuing securities are known as flotation costs. Much like loan fees
or points on a mortgage, flotation costs effectively reduce the net proceeds that a firm will receive from issuing securities. The cost of
capital is adjusted upward to reflect the expected flotation costs incurred to issue securities. Since the flotation costs are reflected in the
weighted average cost of capital, the flotation costs should not be allowed as expenses in projecting cash flows to be capitalized. Each
basic capitalization rate in this study has been adjusted to reflect flotation costs.
V.
Utilization of Other Studies and Data
Staff appraisers reviewed data and capitalization rate studies submitted by assessees and interested parties in addition to a review of
recent regulatory rate case filings and decisions, and where appropriate, used this information in the development of the staff derived
rates.
The capitalization rates published in this study are intended to be applied to the unitary operations of the companies subject to assessment by the
California State Board of Equalization.
3
The covariance of the returns of a security regressed against the returns of the overall market - a measurement of relative volatility
iii
California State Board of Equalization
State-Assessed Properties Division
2016 Capitalization Rate Study
Gas, Electric and Water Companies
SBE No.
Company Name
Gas and Electric Companies
141
San Diego Gas & Electric Company
148
Southern California Edison Company
135
Pacific Gas and Electric Company
106
PacifiCorp
146
Sierra Pacific Power Company
Financial
Ratings
Preferred
Stock
Bond
A
A
B+
Not Rated
Not Rated
A3
Baa1
Baa2
Baa2
Not Rated
A1
A2
A3
A3
Baa1
52%
48%
52%
52%
52%
Rates of Return
Common Preferred
Equity
Stock
Debt
Basic
Cap
Rate
45%
43%
47%
47%
47%
10.79%
10.94%
10.89%
11.52%
11.52%
4.62%
4.69%
5.09%
5.09%
5.48%
7.88%
7.84%
8.12%
8.44%
8.64%
Capital Structure
Common Preferred
Equity
Stock
Debt
3%
9%
1%
1%
1%
6.33%
6.33%
6.33%
6.33%
7.04%
125
163
191
Terra-Gen Dixie Valley, LLC
Liberty Utilities (Calpeco Electric), LLC
Arizona Public Service Company
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
A2
55%
55%
55%
45%
45%
45%
11.52%
11.52%
11.52%
5.09%
5.09%
5.09%
8.62%
8.62%
8.62%
119
156
Trans Bay Cable LLC
DATC Path 15, LLC
Not Rated
Not Rated
Not Rated
A3
55%
55%
45%
45%
14.14%
14.14%
5.09%
5.09%
10.06%
10.06%
Electric Cooperatives
Not Rated
Not Rated
55%
45%
11.52%
5.09%
8.62%
A1
A3
Not Rated
Not Rated
52%
55%
55%
55%
46%
45%
45%
45%
10.58%
10.58%
12.30%
12.30%
4.62%
5.09%
6.02%
6.02%
7.75%
8.11%
9.48%
9.48%
Not Rated
Not Rated
Not Rated
Not Rated
60%
60%
60%
60%
40%
40%
40%
40%
14.40%
14.40%
14.40%
14.40%
7.02%
7.02%
7.02%
7.02%
11.45%
11.45%
11.45%
11.45%
A2
55%
45%
9.87%
4.81%
7.60%
Natural Gas Distribution and Storage Companies
149
Southern California Gas Company
A
152
Southwest Gas Corporation
B++
Alpine Natural Gas Operating Company No. One LLC Not Rated
192
194
West Coast Gas Company, Inc.
Not Rated
104
121
195
198
Central Valley Gas Storage LLC
Gill Ranch Storage, LLC
Wild Goose Storage, LLC
Lodi Gas Storage, LLC
Water Company
101
Golden State Water Company
A3
Not Rated
Not Rated
Not Rated
Not Rated
A
Page 1
2%
6.10%
California State Board of Equalization
State-Assessed Properties Division
2016 Capitalization Rate Study
Natural Gas Transmission Companies
Ratings
SBE No.
Company Name
Capital Structure
Common
Rates of Return
Common
Basic
Cap
Financial
Bond
Equity
Debt
Equity
Debt
Rate
153
Transwestern Pipeline Company
Not Rated
Not Rated
75%
25%
12.04%
5.68%
10.45%
180
North Baja Pipeline, LLC
Not Rated
Not Rated
75%
25%
12.04%
5.68%
10.45%
187
Mojave Pipeline Company, LLC
Not Rated
Not Rated
75%
25%
12.04%
5.68%
10.45%
188
Kern River Gas Transmission Company
Not Rated
Not Rated
75%
25%
12.04%
5.68%
10.45%
189
Standard Pacific Gas Line, Incorporated
Not Rated
Not Rated
75%
25%
12.04%
5.68%
10.45%
190
Tuscarora Gas Transmission Company
Not Rated
Not Rated
75%
25%
12.04%
5.68%
10.45%
196
Questar Southern Trails Pipeline Company
Not Rated
Not Rated
75%
25%
12.04%
5.68%
10.45%
197
El Paso Natural Gas Company, LLC
Not Rated
Not Rated
75%
25%
12.04%
5.68%
10.45%
Page 2
California State Board of Equalization
State-Assessed Properties Division
2016 Capitalization Rate Study
Electric Generation Facilities
Ratings
Facility Type
Capital Structure
Common
Equity
Debt
Rates of Return
Common
Equity
Debt
Basic
Cap
Rate3
Financial
Bond
Modern Electric Generation Technology 1
B
B2
60%
40%
13.61%
7.12%
11.02%
Older Electric Generation Technology 2
B
B2
60%
40%
15.71%
8.14%
12.68%
1
Modern Electric Generation Technology - Generally high efficiency combined-cycle or simple cycle gas turbine electric generation facilities incorporating
contemporary generation technologies.
2
Older Electric Generation Technology - Generally older steam turbine electric generation facilities that were sold off by vertically integrated electric utilities and for
which no replacements, other than for routine maintenance, have been made.
3
Staff may adjust the rates stated above if the specific situation of a facility warrants an adjustment to its basic capitalization rate.
Page 3
California State Board of Equalization
State-Assessed Properties Division
2016 Capitalization Rate Study
Telecommunications Companies
Ratings
SBE No.
Company Name
Capital Structure
Common
Equity
Debt
Rates of Return
Common
Equity
Debt
Basic
Cap
Rate
Financial
Bond
A++
A++
B
C++
A2
A3
Not Rated
Not Rated
70%
70%
65%
65%
30%
30%
35%
35%
11.94%
11.94%
12.98%
15.34%
4.49%
4.88%
5.94%
6.21%
9.70%
9.82%
10.52%
12.14%
Not Rated
Not Rated
65%
35%
15.34%
6.21%
12.14%
Wireless Companies
2606
AT&T Mobility LLC
2532
Los Angeles SMSA Ltd., Partnership
2552
Fresno MSA Limited Partnership
2559
Cellco Partnership
2669
California RSA #4 Partnership
2748
T-Mobile West, LLC
2720
Sprint Telephony PCS, L.P.
A++
A++
A++
A++
A++
B
C++
A2
A3
A3
A3
A3
Not Rated
B3
70%
70%
70%
70%
70%
65%
65%
30%
30%
30%
30%
30%
35%
35%
11.41%
11.41%
11.41%
11.41%
11.41%
12.72%
14.55%
4.49%
4.88%
4.88%
4.88%
4.88%
6.21%
7.53%
9.34%
9.45%
9.45%
9.45%
9.45%
10.44%
12.10%
Other Wireless Companies1
Not Rated
Not Rated
55%
45%
16.65%
9.05%
13.23%
Wireless Reseller Companies
Not Rated
Not Rated
55%
45%
18.74%
9.56%
14.61%
A++
A++
A++
B++
C++
C++
A2
A3
A3
Baa3
B3
Caa2
70%
70%
70%
65%
60%
60%
30%
30%
30%
35%
40%
40%
12.72%
12.72%
12.72%
14.29%
16.65%
16.65%
4.49%
4.88%
4.88%
5.94%
7.53%
9.05%
10.25%
10.37%
10.37%
11.37%
13.00%
13.61%
Other Interexchange Carriers
Not Rated
Not Rated
55%
45%
21.36%
9.05%
15.82%
Other Interexchange Resellers
Not Rated
Not Rated
55%
45%
24.50%
9.56%
17.78%
Local Exchange Companies
279
Pacific Bell Telephone Company
201
Verizon California, Inc.
284
Frontier Communications
294
SureWest Telephone
Other Local Exchange Companies
Interexchange Companies
2310
AT&T Communications
2274
MCI Communications Services, Inc.
2372
MCI Metro Access Transmission Services, LLC
2463
2014
Sprint Communications Company, L.P.
7761
Level 3 Communications, LLC
1
Includes Radio Telephone and Paging Companies
Page 4
California State Board of Equalization
State-Assessed Properties Division
2016 Capitalization Rate Study
Pipeline Companies
Ratings
SBE No.
Company Name
Financial
Bond
Capital Structure
Common
Equity
Debt
Equity
Debt
Basic
Cap
Rate
Rates of Return
402
461
Calnev Pipe Line LLC.
SFPP, L.P.
NR-1
NR-1
NR-b
NR-b
65%
65%
35%
35%
13.61%
13.61%
5.60%
5.60%
10.81%
10.81%
479
480
486
492
Chevron Pipe Line Company
Phillips 66 Pipeline LLC
Pacific Pipeline System LLC
San Pablo Bay Pipeline Company LLC
NR-2
NR-2
NR-2
NR-2
NR-b
NR-b
NR-b
NR-b
65%
65%
65%
65%
35%
35%
35%
35%
14.14%
14.14%
14.14%
14.14%
5.60%
5.60%
5.60%
5.60%
11.15%
11.15%
11.15%
11.15%
Other Pipeline Companies
NR-3
NR-c
65%
35%
15.18%
6.61%
12.18%
Page 5
California State Board of Equalization
State-Assessed Properties Division
2016 Capitalization Rate Study
SBE
No.
Company
Name
Financial
Bond
Capital Structure
Common
Equity
Debt
Rates of Return
Common
Equity
Debt
Basic
Cap
Rate
804
BNSF Railway Company
A++
Baa2
80%
20%
13.61%
5.60%
12.01%
843
A++
Baa2
80%
20%
13.61%
5.60%
12.01%
802
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
810
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
813
Pacific Harbor Lines
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
822
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
826
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
850
Modesto & Empire Traction Company
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
865
San Diego & Imperial Valley Railroad Co. Inc.
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
878
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
882
Trona Railway Co.
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
897
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
899
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
NR-2
NR-2
60%
40%
15.97%
8.14%
12.84%
Page 6
California State Board of Equalization
State-Assessed Properties Division
2016 Capitalization Rate Study
Gas, Electric and Water Companies
SBE No.
Company Name
Gas and Electric Companies
141
San Diego Gas & Electric Company
148
Southern California Edison Company
135
Pacific Gas and Electric Company
106
PacifiCorp
146
Sierra Pacific Power Company
Financial
Ratings
Preferred
Stock
Bond
A
A
B+
Not Rated
Not Rated
A3
Baa1
Baa2
Baa2
Not Rated
A1
A2
A3
A3
Baa1
52%
48%
52%
52%
52%
Rates of Return
Common Preferred
Equity
Stock
Debt
Basic
Cap
Rate
45%
43%
47%
47%
47%
10.79%
10.94%
10.89%
11.52%
11.52%
4.62%
4.69%
5.09%
5.09%
5.48%
7.88%
7.84%
8.12%
8.44%
8.64%
Capital Structure
Common Preferred
Equity
Stock
Debt
3%
9%
1%
1%
1%
6.33%
6.33%
6.33%
6.33%
7.04%
125
163
191
Terra-Gen Dixie Valley, LLC
Liberty Utilities (Calpeco Electric), LLC
Arizona Public Service Company
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
A2
55%
55%
55%
45%
45%
45%
11.52%
11.52%
11.52%
5.09%
5.09%
5.09%
8.62%
8.62%
8.62%
119
156
Trans Bay Cable LLC
DATC Path 15, LLC
Not Rated
Not Rated
Not Rated
A3
55%
55%
45%
45%
14.14%
14.14%
5.09%
5.09%
10.06%
10.06%
Electric Cooperatives
Not Rated
Not Rated
55%
45%
11.52%
5.09%
8.62%
A1
A3
Not Rated
Not Rated
52%
55%
55%
55%
46%
45%
45%
45%
10.58%
10.58%
12.30%
12.30%
4.62%
5.09%
6.02%
6.02%
7.75%
8.11%
9.48%
9.48%
Not Rated
Not Rated
Not Rated
Not Rated
60%
60%
60%
60%
40%
40%
40%
40%
14.40%
14.40%
14.40%
14.40%
7.02%
7.02%
7.02%
7.02%
11.45%
11.45%
11.45%
11.45%
A2
55%
45%
9.87%
4.81%
7.60%
Natural Gas Distribution and Storage Companies
149
Southern California Gas Company
A
152
Southwest Gas Corporation
B++
Alpine Natural Gas Operating Company No. One LLC Not Rated
192
194
West Coast Gas Company, Inc.
Not Rated
104
121
195
198
Central Valley Gas Storage LLC
Gill Ranch Storage, LLC
Wild Goose Storage, LLC
Lodi Gas Storage, LLC
Water Company
101
Golden State Water Company
A3
Not Rated
Not Rated
Not Rated
Not Rated
A
Page 7
2%
6.10%
2016 Capitalization Rate Study
Gas, Electric and Water Companies
Industry Notes
•
In establishing the capital structures for the rate-regulated utilities, staff considered the decisions of the California Public Utilities Commission
(CPUC). For the non-rate-regulated utilities, the capital structures were developed based on the financial data collected and the relative risks of
the utilities sampled in the Capitalization Rate Study.
•
Staff considered the following in the development of equity rates:
1.
2.
3.
4.
•
CPUC-authorized rates of return
FERC-authorized rates of return
Discounted Cash Flow Model
Capital Asset Pricing Model – ex post and ex ante risk premiums
Staff considered the following in the development of debt rates:
1. Moody’s Utility Bond Yield Spreads
2. The debt rates that a prospective purchaser would expect at lien date
•
The following utilities were removed from the 2016 Capitalization Rate Study sample:
1. UIL Holdings Corporation merged with the Spanish company’s U.S unit Iberdrola U.S.
2. Integrys Energy was acquired by Wisconsin Energy Corporation and forming the WEC Energy Group.
•
Northeast Utilities became Eversource Energy on February 2, 2015.
Page 8
2016 Capitalization Rate Study
Gas and Electric Companies
Equity
Recommended
Rate
Flotation
Cost in %
Rate
Moody's
Rating
A
10.30%
4.50%
10.79%
A3
6.22%
A
10.45%
4.50%
10.94%
Baa1
B+
10.40%
4.50%
10.89%
Not Rated
11.00%
4.50%
11.52%
Not Rated
13.50%
4.50%
14.14%
Value Line
Rating
Cost of Capital Adjusted for Flotation Costs =
Preferred Stock
Recommended Flotation
Rate
Cost in %
Debt
Recommended
Flotation
Rate
Cost in %
Rate
Moody's
Rating
1.70%
6.33%
A1
4.54%
1.70%
4.62%
6.22%
1.70%
6.33%
A2
4.61%
1.70%
4.69%
Baa2
6.22%
1.70%
6.33%
A3
5.00%
1.70%
5.09%
Not Rated
6.92%
1.70%
7.04%
Baa1
5.39%
1.70%
5.48%
Not Rated
5.92%
1.70%
6.02%
ku
1-f
Where: ku = The cost of capital unadjusted for flotation costs
f = Flotation cost as a percentage of the value of securities issued
Page 9
Rate
2016 Capitalization Rate Study
Gas and Electric Companies
Summary of Rates of Return
Common Equity
Value Line
Rate of
Preferred Stock
Moody's Bond
Rate of
1
2
Rating
Return
A
10.30%
A3
6.22%
A
10.45%
Baa1
6.22%
B+
10.40%
Baa2
6.22%
Not Rated
11.00%
Not Rated
6.92%
Not Rated
13.50%
Rating
Return
Moody's Bond
Bonds
Moody's
Rate of
Yields
Rating
Return 3
Aaa=N/A
Aaa2
Aaa3
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Not Rated
3.53%
3.75%
3.98%
4.21%
4.28%
4.34%
4.41%
4.80%
5.19%
5.58%
5.72%
5.86%
6.00%
6.14%
6.28%
6.42%
6.56%
6.70%
Aa=4.21
A=4.41
Baa=5.58
1
The Rate of Return on Common Equity was developed by staff based on the relative risks of the utilities in conjunction with the results of various financial
models and pertinent information from different sources. Consideration was also given to the latest decisions of the California Public Utilities
Commission. For 2016 the return on equity (ROE) and return on rate base (ROR) for Pacific Gas and Electric Company are 10.40% and 8.06%,
respectively; for Southern California Edison Company, the ROE and ROR are 10.45% and 7.98%, respectively (D 12-12-034); for San Diego Gas &
Electric Company, the ROE and ROR are 10.30% and 7.79%, respectively (D 12-12-034).
2
The Rate of Return on Preferred Stocks was developed by staff based on the relative risks of the utilities. Consideration was given to the latest decisions
of the California Public Utilities Commission.
3
The Rates of Return on Bonds were based on the 2015 Moody's "Utility Bond Yields" reports. Because Moody's assigns yields only to groups Aaa, Aa,
A and Baa, staff interpolated the difference between these groups to further refine the ratings.
Page 10
2016 Capitalization Rate Study
Gas and Electric Companies
Capital Asset Pricing Model - Ex Ante
Value Line Ratings
A+, A
B++, B+, B
Component
Expected Future Return, S&P 500
Less: Risk Free Return - Long-Term Treasury Rates
1
Beta
2
Risk Free Return - Long-Term Treasury Rates
1
Projected Return on Equity
10.80%
10.80%
2.78%
2.78%
8.02%
8.02%
0.77
0.80
6.18%
6.42%
2.78%
2.78%
8.96%
9.20%
1
US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 31, 2015
2
The estimated betas were derived from a sample of gas and electric companies with similar ratings.
Page 11
2016 Capitalization Rate Study
Gas and Electric Companies
Capital Asset Pricing Model - Ex Post
A+, A
Component
Common Stock Returns, S&P 500 (1928 - 2015) 1
Less: 10 Year Treasury Bonds (1928 - 2015)
1
Beta
2
Risk Free Return - Long-Term Treasury Rates
3
Projected Return on Equity
Value Line Ratings
B++, B+, B
11.41%
11.41%
5.23%
5.23%
6.18%
6.18%
0.77
0.80
4.76%
4.94%
2.78%
2.78%
7.54%
7.72%
1
Damodaran Online, January 6, 2016
2
The estimated betas were derived from a sample of gas and electric companies with similar ratings.
3
US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 31, 2015
Page 12
2016 Capitalization Rate Study
Gas and Electric Companies
Equity Rates
a
b
Value Line
Rating
Company
Name
A+
A+
A+
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
Consolidated Edison, Inc.
Pinnacle West Capital Corporation
WEC Energy Group Inc.
Allete, Inc.
Alliant Energy Corporation
Ameren Corporation
American Electric Power Co., Inc.
Avista Corp.
Black Hills Corporation
Cleco Corporation
Duke Energy Corporation
Edison International
Eversource Energy
Hawaiian Electric Industries Inc.
MGE Energy Inc.
NextEra Energy, Inc.
OGE Energy Corp.
Sempra Energy
Southern Company
Vectren Corporation
Xcel Energy Inc.
c
d
e
f
g
Stock
Est.
Est.
Price
2016
2015
2015
2016
12/31/15 Earnings Earnings Dividends Dividends
64.27
64.48
51.31
50.83
62.45
43.23
58.27
35.37
46.43
52.21
71.39
59.21
51.07
28.95
46.40
103.89
26.29
94.01
46.79
42.42
35.91
4.10
3.95
2.90
3.20
3.85
2.75
3.70
2.00
3.00
2.25
4.65
4.35
3.00
1.55
2.40
6.30
1.85
4.95
2.95
2.55
2.15
3.95
3.85
2.40
3.50
3.65
2.45
3.70
1.90
2.90
2.20
4.30
4.40
2.80
1.40
2.25
6.05
1.75
4.80
2.85
2.35
2.05
2.60
2.44
1.76
2.02
2.20
1.66
2.15
1.32
1.62
1.60
3.24
1.71
1.67
1.24
1.16
3.08
1.05
2.80
2.15
1.54
1.28
Mean
Median
Weighted Average
2.68
2.56
1.98
2.08
2.36
1.72
2.27
1.37
1.68
1.60
3.36
1.89
1.78
1.24
1.20
3.50
1.16
2.96
2.22
1.62
1.36
h
Dividend
Yield
(g/c)
i
Est.
Dividend
Growth
j
Est.
Earnings
Growth
k
E/P
Ratio
(d/c)
l
DvYld+
DvGrth
(h+i)
m
DvYld+
ErngsGr
(h+j)
4.17%
3.97%
3.86%
4.09%
3.78%
3.98%
3.90%
3.87%
3.62%
3.06%
4.71%
3.19%
3.49%
4.28%
2.59%
3.37%
4.41%
3.15%
4.74%
3.82%
3.79%
2.50%
3.50%
8.50%
3.00%
4.50%
3.50%
5.00%
4.00%
4.00%
4.00%
3.50%
10.00%
6.50%
1.00%
4.00%
11.00%
10.00%
6.00%
3.00%
4.00%
6.00%
3.00%
4.57%
6.60%
5.50%
5.67%
6.67%
4.80%
5.00%
4.57%
1.75%
4.13%
2.87%
7.30%
3.30%
7.00%
7.23%
3.27%
8.70%
4.03%
6.73%
4.73%
6.38%
6.13%
5.65%
6.30%
6.16%
6.36%
6.35%
5.65%
6.46%
4.31%
6.51%
7.35%
5.87%
5.35%
5.17%
6.06%
7.04%
5.27%
6.30%
6.01%
5.99%
6.67%
7.47%
12.36%
7.09%
8.28%
7.48%
8.90%
7.87%
7.62%
7.06%
8.21%
13.19%
9.99%
5.28%
6.59%
14.37%
14.41%
9.15%
7.74%
7.82%
9.79%
7.17%
8.54%
10.46%
9.59%
9.45%
10.65%
8.70%
8.87%
8.19%
4.81%
8.84%
6.06%
10.79%
7.58%
9.59%
10.60%
7.68%
11.85%
8.78%
10.55%
8.52%
3.80%
3.86%
5.12%
4.00%
5.12%
4.80%
6.03%
6.13%
8.92%
7.87%
9.72%
8.92%
8.84%
9.18%
Sources: Columns a, d, e, f, g and i were extracted from Value Line.
Column j represents the average estimated earnings growth extracted from Value Line, Zacks.com and ThomsonReuters.com.
Column c was acquired from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Page 13
2016 Capitalization Rate Study
Gas and Electric Companies
Equity Rates
a
b
Value Line
Rating
Company
Name
B++
B++
B++
B++
B++
B++
B++
B++
B++
B+
B+
B+
B+
B+
B+
B
CMS Energy Corp.
DTE Energy Company
El Paso Electric Co.
Empire District Electric Company
Entergy Corporation
Exelon Corporation
Portland General Electric Company
SCANA Corp.
Westar Energy, Inc.
CenterPoint Energy, Inc.
FirstEnergy Corp.
Great Plains Energy Incorporated
Otter Tail Corporation
Pepco Holdings, Inc.
PG&E Corporation
PNM Resources, Inc.
c
d
e
f
g
h
Stock
Est.
Est.
Dividend
Price
2016
2015
2015
2016
Yield
(g/c)
12/31/15 Earnings Earnings Dividends Dividends
36.08
80.19
38.50
28.07
68.36
27.77
36.37
60.49
42.41
18.36
31.73
27.31
26.63
26.01
53.19
30.57
2.00
4.90
2.20
1.45
4.50
2.65
2.40
3.95
2.45
1.15
2.65
1.75
1.75
1.35
3.30
1.65
1.88
4.60
1.95
1.35
6.00
2.60
2.15
3.85
2.25
1.10
2.00
1.35
1.60
1.05
1.90
1.55
1.16
2.84
1.17
1.04
3.34
1.24
1.18
2.18
1.44
0.99
1.44
1.00
1.23
1.08
1.82
0.80
1.24
3.00
1.23
1.04
3.42
1.24
1.26
2.26
1.50
1.03
1.48
1.06
1.25
1.08
1.82
0.85
i
j
Est.
Est.
Dividend Earnings
Growth Growth
k
E/P
Ratio
(d/c)
l
DvYld+
DvGrth
(h+i)
m
DvYld+
ErngsGr
(h+j)
3.44%
3.74%
3.19%
3.71%
5.00%
4.47%
3.46%
3.74%
3.54%
5.61%
4.66%
3.88%
4.69%
4.15%
3.42%
2.78%
6.50%
5.50%
5.00%
2.00%
2.50%
-2.00%
5.50%
3.50%
3.00%
5.00%
-1.50%
6.00%
1.50%
0.00%
3.00%
10.00%
6.13%
5.17%
5.10%
4.33%
-1.73%
5.20%
4.83%
4.43%
4.37%
1.07%
3.05%
5.13%
9.00%
6.43%
6.93%
8.67%
5.54%
6.11%
5.71%
5.17%
6.58%
9.54%
6.60%
6.53%
5.78%
6.26%
8.35%
6.41%
6.57%
5.19%
6.20%
5.40%
9.94%
9.24%
8.19%
5.71%
7.50%
2.47%
8.96%
7.24%
6.54%
10.61%
3.16%
9.88%
6.19%
4.15%
6.42%
12.78%
9.57%
8.91%
8.29%
8.04%
3.27%
9.67%
8.30%
8.17%
7.90%
6.68%
7.71%
9.01%
13.69%
10.59%
10.36%
11.45%
Mean
3.97%
3.47%
4.88%
6.37%
7.44%
8.85%
Median
3.74%
3.25%
5.12%
6.23%
7.37%
8.60%
6.34%
8.55%
Weighted Average
Sources: Columns a, d, e, f, g and i were extracted from Value Line.
Column j represents the average estimated earnings growth extracted from Value Line, Zacks.com and ThomsonReuters.com.
Column c was acquired from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Page 14
2016 Capitalization Rate Study
Gas and Electric Companies
Long Term Earnings Growth
a
Value Line Rating
b
Company Name
A+
A+
A+
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
Consolidated Edison, Inc.
Pinnacle West Capital Corporation
WEC Energy Group Inc.
Allete, Inc.
Alliant Energy Corporation
Ameren Corporation
American Electric Power Co., Inc.
Avista Corp.
Black Hills Corporation
Cleco Corporation
Duke Energy Corporation
Edison International
Eversource Energy
Hawaiian Electric Industries Inc.
MGE Energy Inc.
NextEra Energy, Inc.
OGE Energy Corp.
Sempra Energy
Southern Company
Vectren Corporation
Xcel Energy Inc.
c
Value Line
3.00%
4.00%
6.00%
6.50%
6.00%
7.00%
5.00%
5.00%
6.00%
0.50%
5.00%
3.50%
8.50%
3.50%
7.00%
7.50%
3.00%
8.50%
4.50%
9.50%
4.50%
Page 15
d
Zacks
3.10%
4.80%
6.20%
5.00%
5.40%
6.60%
4.80%
5.00%
4.20%
3.00%
4.10%
4.50%
6.80%
3.20%
N/A
7.10%
4.60%
8.20%
3.90%
5.70%
5.00%
e
Thomson
2.90%
4.90%
7.60%
5.00%
5.60%
6.40%
4.60%
N/A
3.50%
N/A
3.30%
0.60%
6.60%
3.20%
N/A
7.10%
2.20%
9.40%
3.70%
5.00%
4.70%
f
Average
3.00%
4.57%
6.60%
5.50%
5.67%
6.67%
4.80%
5.00%
4.57%
1.75%
4.13%
2.87%
7.30%
3.30%
7.00%
7.23%
3.27%
8.70%
4.03%
6.73%
4.73%
2016 Capitalization Rate Study
Gas and Electric Companies
Long Term Earnings Growth
a
b
c
d
e
f
Value Line Rating
Company Name
Value Line
Zacks
Thomson
Average
B++
B++
B++
B++
B++
B++
B++
B++
B++
B+
B+
B+
B+
B+
B+
B
CMS Energy Corp.
DTE Energy Company
El Paso Electric Co.
Empire District Electric Company
Entergy Corporation
Exelon Corporation
Portland General Electric Company
SCANA Corp.
Westar Energy, Inc.
CenterPoint Energy, Inc.
FirstEnergy Corp.
Great Plains Energy Incorporated
Otter Tail Corporation
Pepco Holdings, Inc.
PG&E Corporation
PNM Resources, Inc.
Mean
Median
Weighted Average
5.50%
5.00%
3.50%
3.00%
-1.00%
7.50%
6.00%
4.50%
6.00%
0.00%
7.00%
5.00%
9.00%
8.00%
10.50%
9.00%
6.20%
5.50%
6.70%
5.00%
-1.70%
4.20%
4.40%
4.30%
3.60%
2.80%
N/A
5.60%
N/A
7.00%
4.50%
7.70%
6.70%
5.00%
N/A
5.00%
-2.50%
3.90%
4.10%
4.50%
3.50%
0.40%
-0.90%
4.80%
N/A
4.30%
5.80%
9.30%
6.13%
5.17%
5.10%
4.33%
-1.73%
5.20%
4.83%
4.43%
4.37%
1.07%
3.05%
5.13%
9.00%
6.43%
6.93%
8.67%
5.47%
5.50%
4.91%
4.90%
4.38%
4.65%
5.01%
5.00%
4.95%
Sources: Columns a and c were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from ThomsonReuters.com.
Page 16
2016 Capitalization Rate Study
Gas and Electric Companies
Capital Structure
a
b
Value Line
Rating
Company
Name
A+
A+
A+
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
Consolidated Edison, Inc.
Pinnacle West Capital Corporation
WEC Energy Group Inc.
Allete, Inc.
Alliant Energy Corporation
Ameren Corporation
American Electric Power Co., Inc.
Avista Corp.
Black Hills Corporation
Cleco Corporation
Duke Energy Corporation
Edison International
Eversource Energy
Hawaiian Electric Industries Inc.
MGE Energy Inc.
NextEra Energy, Inc.
OGE Energy Corp.
Sempra Energy
Southern Company
Vectren Corporation
Xcel Energy Inc.
c
d
e
Common Mkt Value
Common
Stock
Stock Price Equity
Outstanding 12/31/15 (\$million)
293,192,258
110,813,659
315,684,451
48,965,562
113,360,425
242,634,798
490,817,402
62,296,577
44,834,944
60,482,051
688,334,378
325,811,206
317,173,164
107,456,645
34,668,370
460,535,906
199,702,572
247,915,696
908,424,808
82,703,774
507,211,342
64.27
64.48
51.31
50.83
62.45
43.23
58.27
35.37
46.43
52.21
71.39
59.21
51.07
28.95
46.40
103.89
26.29
94.01
46.79
42.42
35.91
18,843.47
7,145.26
16,197.77
2,488.92
7,079.36
10,489.10
28,599.93
2,203.43
2,081.69
3,157.77
49,140.19
19,291.28
16,198.03
3,110.87
1,608.61
47,845.08
5,250.18
23,306.55
42,505.20
3,508.29
18,213.96
f
g
h
L.T.
Pfd
Common
Debt
Stock
Equity
(\$million) (\$million) (\$million)
11,521.00
0.00
3,565.90
0.00
8,727.00
81.50
1,549.00
0.00
3,855.80 200.00
5,981.00 142.00
17,600.00
0.00
1,546.40
0.00
1,567.70
0.00
1,207.20
0.00
37,667.00
0.00
11,265.00 2,022.00
8,689.60 155.60
1,506.50
34.30
392.10
0.00
25,604.00
0.00
2,645.50
0.00
12,626.00
20.00
22,674.00 940.00
1,522.70
0.00
11,896.00
0.00
18,843.47
7,145.26
16,197.77
2,488.92
7,079.36
10,489.10
28,599.93
2,203.43
2,081.69
3,157.77
49,140.19
19,291.28
16,198.03
3,110.87
1,608.61
47,845.08
5,250.18
23,306.55
42,505.20
3,508.29
18,213.96
Mean
Median
Weighted Average
Sources: Columns a, c, f and g were extracted from Value Line.
Column d was acquired from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Page 17
i
Total
Capital
(\$million)
30,364.47
10,711.16
25,006.27
4,037.92
11,135.16
16,612.10
46,199.93
3,749.83
3,649.39
4,364.97
86,807.19
32,578.28
25,043.23
4,651.67
2,000.71
73,449.08
7,895.68
35,952.55
66,119.20
5,030.99
30,109.96
j
L.T.
Debt
%
k
Pfd
Stock
%
l
Common
Equity
%
37.94%
33.29%
34.90%
38.36%
34.63%
36.00%
38.10%
41.24%
42.96%
27.66%
43.39%
34.58%
34.70%
32.39%
19.60%
34.86%
33.51%
35.12%
34.29%
30.27%
39.51%
0.00%
0.00%
0.33%
0.00%
1.80%
0.85%
0.00%
0.00%
0.00%
0.00%
0.00%
6.21%
0.62%
0.74%
0.00%
0.00%
0.00%
0.06%
1.42%
0.00%
0.00%
62.06%
66.71%
64.77%
61.64%
63.58%
63.14%
61.90%
58.76%
57.04%
72.34%
56.61%
59.22%
64.68%
66.88%
80.40%
65.14%
66.49%
64.83%
64.29%
69.73%
60.49%
35.11%
34.86%
36.85%
0.57%
0.00%
0.68%
64.32%
64.29%
62.47%
2016 Capitalization Rate Study
Gas and Electric Companies
Capital Structure
a
b
Value Line
Rating
Company Name
B++
B++
B++
B++
B++
B++
B++
B++
B++
B+
B+
B+
B+
B+
B+
B
CMS Energy Corp.
DTE Energy Company
El Paso Electric Co.
Empire District Electric Company
Entergy Corporation
Exelon Corporation
Portland General Electric Company
SCANA Corp.
Westar Energy, Inc.
CenterPoint Energy, Inc.
FirstEnergy Corp.
Great Plains Energy Incorporated
Otter Tail Corporation
Pepco Holdings, Inc.
PG&E Corporation
PNM Resources, Inc.
c
d
e
Common Mkt Value
Common
Stock
Stock Price
Equity
Outstanding 12/31/15 (\$million)
277,100,000
179,475,625
40,424,525
43,787,249
178,386,800
861,617,731
88,765,889
142,916,917
141,838,178
430,262,191
422,453,361
154,369,354
37,743,953
253,617,191
482,010,056
79,653,624
36.08
80.19
38.50
28.07
68.36
27.77
36.37
60.49
42.41
18.36
31.73
27.31
26.63
26.01
53.19
30.57
9,997.77
14,392.15
1,556.34
1,229.11
12,194.52
23,927.12
3,228.42
8,645.04
6,015.36
7,899.61
13,404.45
4,215.83
1,005.12
6,596.58
25,638.11
2,435.01
f
g
h
i
j
k
l
L.T.
Debt
(\$million)
Pfd
Stock
(\$million)
Common
Equity
(\$million)
Total
Capital
(\$million)
L.T.
Debt
%
Pfd
Stock
%
Common
Equity
%
8,014.00
8,856.00
1,134.20
863.00
13,080.00
25,868.00
2,204.00
6,018.00
2,941.90
7,662.00
18,570.00
3,763.50
498.30
5,028.00
15,544.00
1,731.20
37.00
0.00
0.00
0.00
210.80
193.00
0.00
0.00
0.00
0.00
0.00
39.00
0.00
0.00
252.00
11.50
Mean
Median
Weighted Average
Sources: Columns a, c, f and g were extracted from Value Line.
Column d was acquired from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Page 18
9,997.77
14,392.15
1,556.34
1,229.11
12,194.52
23,927.12
3,228.42
8,645.04
6,015.36
7,899.61
13,404.45
4,215.83
1,005.12
6,596.58
25,638.11
2,435.01
18,048.77
23,248.15
2,690.54
2,092.11
25,485.32
49,988.12
5,432.42
14,663.04
8,957.26
15,561.61
31,974.45
8,018.33
1,503.42
11,624.58
41,434.11
4,177.71
44.40%
38.09%
42.16%
41.25%
51.32%
51.75%
40.57%
41.04%
32.84%
49.24%
58.08%
46.94%
33.14%
43.25%
37.51%
41.44%
0.21%
0.00%
0.00%
0.00%
0.83%
0.39%
0.00%
0.00%
0.00%
0.00%
0.00%
0.49%
0.00%
0.00%
0.61%
0.28%
55.39%
61.91%
57.84%
58.75%
47.85%
47.87%
59.43%
58.96%
67.16%
50.76%
41.92%
52.58%
66.86%
56.75%
61.88%
58.29%
43.31%
41.80%
45.97%
0.17%
0.00%
0.28%
56.51%
58.07%
53.75%
2016 Capitalization Rate Study
Gas and Electric Companies
Beta Analysis
a
b
Value Line
Rating
A+
A+
A+
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
Company Name
c
Value
Line
Beta
Consolidated Edison, Inc.
Pinnacle West Capital Corporation
WEC Energy Group Inc.
Allete, Inc.
Alliant Energy Corporation
Ameren Corporation
American Electric Power Co., Inc.
Avista Corp.
Black Hills Corporation
Cleco Corporation
Duke Energy Corporation
Edison International
Eversource Energy
Hawaiian Electric Industries Inc.
MGE Energy Inc.
NextEra Energy, Inc.
OGE Energy Corp.
Sempra Energy
Southern Company
Vectren Corporation
Xcel Energy Inc.
d
Zacks
Beta
e
Standard
& Poor's
Beta
0.60
0.75
0.70
0.80
0.80
0.75
0.70
0.80
0.95
0.75
0.65
0.70
0.75
0.80
0.75
0.75
0.95
0.80
0.60
0.75
0.65
-0.06
0.33
0.10
0.61
0.43
0.31
0.19
0.44
0.77
0.40
0.03
0.25
0.34
0.21
0.35
0.39
0.61
0.44
0.00
0.51
0.13
Mean
0.75
Median
Weighted Average
0.75
f
Average
Beta
g
Company's
Tax
Rate
h
Debt
Equity
Ratio1
Unlevered
Beta2
0.09
0.31
0.19
0.74
0.42
0.27
0.34
0.64
0.80
0.54
0.14
0.39
0.40
0.24
0.46
0.34
0.67
0.39
0.08
0.55
0.23
0.21
0.46
0.33
0.72
0.55
0.44
0.41
0.63
0.84
0.56
0.27
0.45
0.50
0.42
0.52
0.49
0.74
0.54
0.23
0.60
0.34
0.35
0.35
0.39
0.20
0.15
0.38
0.36
0.37
0.34
0.36
0.33
0.21
0.38
0.33
0.35
0.31
0.27
0.29
0.33
0.35
0.35
0.60
0.51
0.50
0.56
0.53
0.70
0.67
0.74
0.65
0.47
0.65
0.81
0.59
0.52
0.29
0.66
0.44
0.57
0.55
0.55
0.69
0.43
0.56
0.54
0.55
0.55
0.52
0.49
0.54
0.66
0.58
0.45
0.43
0.55
0.59
0.63
0.51
0.72
0.57
0.44
0.55
0.45
0.32
0.39
0.49
0.58
0.54
0.34
0.39
0.49
0.39
0.57
0.62
0.55
0.49
Relevered Beta based on 45% Debt Capital Structure and Mean Unlevered Beta 3
Relevered Beta based on 45% Debt Capital Structure and Weighted Average Unlevered Beta
i
0.80
3
0.74
Sources: Columns a, c and g were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from Standard and Poor's Stock Reports.
1
Average Debt to Equity Ratio over the last five years.
2
Unlevered Beta = Beta/[1+(1-tc)(D/E)]; where D/E is the debt to equity ratio, tc is the company's most recent tax rate.
3
Relevered Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the debt to equity ratio, tp is a prospective purchaser's tax rate (assumed to be 40%).
Page 19
2016 Capitalization Rate Study
Gas and Electric Companies
Beta Analysis
a
Value Line
Rating
B++
B++
B++
B++
B++
B++
B++
B++
B++
B+
B+
B+
B+
B+
B+
B
b
Company Name
c
Value
Line
Beta
CMS Energy Corp.
DTE Energy Company
El Paso Electric Co.
Empire District Electric Company
Entergy Corporation
Exelon Corporation
Portland General Electric Company
SCANA Corp.
Westar Energy, Inc.
CenterPoint Energy, Inc.
FirstEnergy Corp.
Great Plains Energy Incorporated
Otter Tail Corporation
Pepco Holdings, Inc.
PG&E Corporation
PNM Resources, Inc.
Mean
Median
Weighted Average
d
Zacks
Beta
e
Standard
& Poor's
Beta
0.75
0.75
0.75
0.70
0.70
0.70
0.80
0.75
0.75
0.85
0.70
0.85
0.85
0.75
0.65
0.85
0.14
0.28
0.29
0.29
0.33
0.18
0.41
0.21
0.25
0.31
0.08
0.43
0.79
0.37
0.22
0.27
0.76
0.75
0.30
0.29
f
Average
Beta
g
Company's
Tax
Rate
h
Debt
Equity
Ratio1
Unlevered
Beta2
0.23
0.24
0.43
0.45
0.28
0.45
0.41
0.30
0.45
0.38
0.22
0.50
1.08
0.25
0.22
0.49
0.37
0.42
0.49
0.48
0.44
0.44
0.54
0.42
0.48
0.51
0.33
0.59
0.91
0.46
0.36
0.54
0.39
0.28
0.33
0.38
0.23
0.30
0.25
0.32
0.30
0.35
0.38
0.35
0.25
0.35
0.23
0.35
0.98
0.80
0.59
0.71
0.97
0.73
0.76
0.75
0.71
0.91
1.17
0.90
0.48
0.77
0.66
0.91
0.47
0.48
0.54
0.48
0.40
0.46
0.51
0.50
0.50
0.53
0.40
0.54
0.63
0.50
0.43
0.53
0.40
0.40
0.49
0.47
0.43
0.80
0.77
0.84
0.49
0.50
0.46
Relevered Beta based on 47% Debt Capital Structure and Mean Unlevered Beta 3
Relevered Beta based on 47% Debt Capital Structure and Weighted Average Unlevered Beta
i
3
Sources: Columns a, c and g were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from Standard and Poor's Stock Reports.
1
Average Debt to Equity Ratio over the last five years.
Unlevered Beta = Beta/[1+(1-tc)(D/E)]; where D/E is the debt to equity ratio, tc is the company's most recent tax rate.
3
Relevered Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the debt to equity ratio, tp is the prospective purchaser's tax rate (assumed to be 40%).
2
Page 20
0.76
0.71
2016 Capitalization Rate Study
Natural Gas Distribution Companies
Value Line
Rating
Equity
Rate
Cost in %
Rate
A, B++
10.10%
4.50%
10.58%
Not Rated
11.75%
4.50%
Not Rated
13.75%
4.50%
Moody's
Rating
A3
Preferred Stock
Recommended Flotation
Rate
Cost in %
6.00%
1.70%
Rate
Debt
Recommended
Flotation
Rate
Cost in %
Rate
Aa2
4.41%
1.70%
4.49%
12.30%
Aa3
4.48%
1.70%
4.55%
14.40%
A1
4.54%
1.70%
4.62%
A2
4.61%
1.70%
4.69%
A3
5.00%
1.70%
5.09%
Baa1
5.39%
1.70%
5.48%
Baa2
5.78%
1.70%
5.88%
Baa3
5.92%
1.70%
6.02%
Ba1
6.06%
1.70%
6.16%
Ba2
6.20%
1.70%
6.31%
Ba3
6.34%
1.70%
6.45%
Not Rated
6.90%
1.70%
7.02%
ku
1-f
Where: ku = The cost of capital unadjusted for flotation costs
Cost of Capital Adjusted for Flotation Costs =
f = Flotation cost as a percentage of the value of securities issued
Page 21
6.10%
Moody's
Rating
2016 Capitalization Rate Study
Natural Gas Distribution Companies
Summary of Rates of Return
Common Equity
Value Line
Preferred Stock
Rate of
1
Rating
Return
A, B++
10.10%
Not Rated
11.75%
Moody's Bond
Bonds
Rate of
Rating
Return
A3
6.00%
2
Moody's Bond
Moody's
Rate of
Yields
Rating
Return 3
Aaa2
Aaa3
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Not Rated
3.53%
3.75%
3.98%
4.21%
4.28%
4.34%
4.41%
4.80%
5.19%
5.58%
5.72%
5.86%
6.00%
6.14%
6.28%
6.42%
6.56%
6.70%
Aaa=N/A
Aa=4.21
Not Rated
13.75%
A=4.41
Baa=5.58
1
The Rate of Return on Common Equity was developed by staff based on the relative risks of the utilities in conjunction with the results
of various financial models and pertinent information from different sources. Consideration was also given to the latest decisions of the
California Public Utilities Commission. For 2016, the return on equity (ROE) and return on rate base (ROR) for Southern California
Gas Company are 10.10% and 8.02%, respectively (D 12-12-034); for Southwest Gas Corporation, the ROE and ROR are 10.10% and
8.18% , respectively.
2
The Rate of Return on Preferred Stocks was developed by staff based on the relative risks of the utilities. Consideration was given to
the latest decisions of the California Public Utilities Commission.
3
The Rates of Return on Bonds were based on the 2015 Moody's "Utility Bond Yields" reports. Because Moody's assigns yields only to
groups Aaa, Aa, A and Baa, staff interpolated the difference between these groups to further refine the ratings.
Page 22
2016 Capitalization Rate Study
Natural Gas Distribution Companies
Capital Asset Pricing Model - Ex Ante
Value Line Ratings
A+, A, B++, B+
Component
Expected Future Return, S&P 500
10.80%
Less: Risk Free Return - Long-Term Treasury Rates
1
2.78%
Beta
8.02%
2
0.79
Risk Free Return - Long-Term Treasury Rates
6.32%
1
2.78%
Projected Return on Equity
9.10%
1
US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 31, 2015
2
The estimated betas were derived from a sample of natural gas distribution companies with similar ratings.
Page 23
2016 Capitalization Rate Study
Natural Gas Distribution Companies
Capital Asset Pricing Model - Ex Post
Value Line Ratings
A+, A, B++, B+
Component
Common Stock Returns, S&P 500 (1928 - 2015) 1
Less: 10 Year Treasury Bonds (1928 - 2015)
11.41%
1
5.23%
Beta
6.18%
2
0.79
Risk Free Return - Long-Term Treasury Rates
4.87%
3
2.78%
Projected Return on Equity
7.65%
1
Damodaran Online, January 6, 2016
2
The estimated betas were derived from a sample of natural gas distribution companies with similar ratings.
3
US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 31, 2015
Page 24
2016 Capitalization Rate Study
Natural Gas Distribution Companies
Equity Rates
a
b
Value Line
Rating
Company
Name
A+
A
A
A
A
A
B++
B++
B++
B++
B+
New Jersey Resources Corp.
AGL Resources Inc.
Atmos Energy Corporation
Northwest Natural Gas Company
South Jersey Industries, Inc.
WGL Holdings Inc.
Laclede Group, Inc.
Piedmont Natural Gas Co. Inc.
Southwest Gas Corporation
UGI Corporation
NiSource Inc.
c
d
e
f
g
h
i
Est.
Est.
Dividend
Est.
Stock
Price
2016
2015
2015
2016
Yield
Dividend
12/31/15 Earnings Earnings Dividends Dividends (g/c)
Growth
32.96
63.81
63.04
50.61
23.52
62.99
59.41
57.02
55.16
33.76
19.51
1.65
3.25
3.25
2.20
1.60
3.10
3.40
2.00
3.20
2.15
1.20
1.78
3.10
3.09
1.80
1.45
3.16
3.16
1.85
2.85
2.01
1.10
0.93
2.04
1.56
1.87
1.02
1.83
1.84
1.31
1.62
0.90
0.83
Mean
Median
Weighted Average
0.96
2.10
1.68
1.91
1.10
1.87
1.96
1.35
1.74
0.92
0.66
j
Est.
Earnings
Growth
k
E/P
Ratio
(d/c)
l
DvYld+
DvGrth
(h+i)
m
DvYld+
ErngsGr
(h+j)
2.91%
3.29%
2.66%
3.77%
4.68%
2.97%
3.30%
2.37%
3.15%
2.73%
3.38%
3.50%
4.50%
5.00%
2.50%
7.00%
3.00%
4.50%
3.00%
8.00%
5.00%
-3.50%
5.33%
-1.23%
7.00%
5.00%
7.00%
6.33%
6.43%
4.33%
5.33%
6.70%
-5.07%
5.01%
5.09%
5.16%
4.35%
6.80%
4.92%
5.72%
3.51%
5.80%
6.37%
6.15%
6.41%
7.79%
7.66%
6.27%
11.68%
5.97%
7.80%
5.37%
11.15%
7.73%
-0.12%
8.25%
2.06%
9.66%
8.77%
11.68%
9.30%
9.73%
6.70%
8.49%
9.43%
-1.68%
3.20%
3.15%
3.86%
4.50%
4.29%
5.33%
5.35%
5.16%
7.07%
7.66%
6.25%
7.49%
8.77%
6.00%
Sources: Columns a, d, e, f, g and i were extracted from Value Line.
Column j represents the average estimated earnings growth extracted from Value Line, Zacks.com and ThomsonReuters.com.
Column c was acquired from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Page 25
2016 Capitalization Rate Study
Natural Gas Distribution Companies
Long Term Earnings Growth
a
Value Line
Rating
A+
A
A
A
A
A
B++
B++
B++
B++
B+
b
c
d
e
f
Company Name
Value Line
Zacks
Thomson
Average
New Jersey Resources Corp.
AGL Resources Inc.
Atmos Energy Corporation
Northwest Natural Gas Company
South Jersey Industries, Inc.
WGL Holdings Inc.
Laclede Group, Inc.
Piedmont Natural Gas Co. Inc.
Southwest Gas Corporation
UGI Corporation
NiSource Inc.
4.00%
6.50%
7.00%
7.00%
7.00%
5.50%
10.00%
3.00%
7.00%
5.00%
-1.50%
6.00%
0.40%
7.00%
4.00%
N/A
6.50%
4.80%
5.00%
5.00%
7.10%
-0.80%
6.00%
-10.60%
7.00%
4.00%
N/A
7.00%
4.50%
5.00%
4.00%
8.00%
-12.90%
5.33%
-1.23%
7.00%
5.00%
7.00%
6.33%
6.43%
4.33%
5.33%
6.70%
-5.07%
Mean
Median
Weighted Average
5.50%
6.50%
4.50%
5.00%
2.20%
4.75%
4.29%
5.33%
2.91%
Sources: Columns a and c were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from ThomsonReuters.com.
Page 26
2016 Capitalization Rate Study
Natural Gas Distribution Companies
Capital Structure
a
b
Value Line
Rating
Company Name
A+
A
A
A
A
A
B++
B++
B++
B++
B+
New Jersey Resources Corp.
AGL Resources Inc.
Atmos Energy Corporation
Northwest Natural Gas Company
South Jersey Industries, Inc.
WGL Holdings Inc.
Laclede Group, Inc.
Piedmont Natural Gas Co. Inc.
Southwest Gas Corporation
UGI Corporation
NiSource Inc.
c
Common
Stock
Outstanding
85,796,206
120,239,934
101,369,699
27,371,642
69,294,447
49,831,775
43,350,411
79,205,112
47,375,398
172,778,018
318,671,280
d
e
Common Mkt Value
Stock Price
Equity
12/31/15 (\$million)
32.96
63.81
63.04
50.61
23.52
62.99
59.41
57.02
55.16
33.76
19.51
2,827.84
7,672.51
6,390.35
1,385.28
1,629.81
3,138.90
2,575.45
4,516.28
2,613.23
5,832.99
6,217.28
f
L.T.
Debt
(\$million)
843.60
3,150.00
2,455.30
621.70
937.40
944.20
1,771.50
1,384.50
1,540.40
3,628.30
6,133.50
g
h
i
Pfd
Common
Total
Stock
Equity
Capital
(\$million) (\$million) (\$million)
0.00
0.00
0.00
0.00
0.00
28.20
0.00
0.00
0.00
0.00
0.00
Mean
Median
Weighted Average
Sources:
Columns a, c, f and g were extracted from Value Line.
Column d was acquired from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Page 27
2,827.84 3,671.44
7,672.51 10,822.51
6,390.35 8,845.65
1,385.28 2,006.98
1,629.81 2,567.21
3,138.90 4,111.30
2,575.45 4,346.95
4,516.28 5,900.78
2,613.23 4,153.63
5,832.99 9,461.29
6,217.28 12,350.78
j
L.T.
Debt
%
k
Pfd
Stock
%
l
Common
Equity
%
22.98%
29.11%
27.76%
30.98%
36.51%
22.97%
40.75%
23.46%
37.09%
38.35%
49.66%
0.00%
0.00%
0.00%
0.00%
0.00%
0.69%
0.00%
0.00%
0.00%
0.00%
0.00%
77.02%
70.89%
72.24%
69.02%
63.49%
76.35%
59.25%
76.54%
62.91%
61.65%
50.34%
32.69%
30.98%
34.31%
0.06%
0.00%
0.04%
67.25%
69.02%
65.65%
2016 Capitalization Rate Study
Natural Gas Distribution Companies
Beta Analysis
a
b
Rating
Company Name
Beta
Beta
Beta
Beta
Rate
h
Debt
Equity
1
Ratio
A+
A
A
A
A
A
B++
B++
B++
B++
B+
New Jersey Resources Corp.
AGL Resources Inc.
Atmos Energy Corporation
Northwest Natural Gas Company
South Jersey Industries, Inc.
WGL Holdings Inc.
Laclede Group, Inc.
Piedmont Natural Gas Co. Inc.
Southwest Gas Corporation
UGI Corporation
NiSource Inc.
0.80
0.60
0.80
0.65
0.80
0.75
0.70
0.75
0.80
0.95
NMF
0.51
-0.07
0.42
0.35
0.67
0.58
0.34
0.92
0.59
0.71
0.23
0.54
0.35
0.48
0.53
0.69
0.54
0.37
0.85
0.65
0.63
0.33
0.62
0.29
0.57
0.51
0.72
0.62
0.47
0.84
0.68
0.76
0.28
0.32
0.38
0.38
0.43
0.20
0.39
0.28
0.25
0.35
0.30
0.37
0.27
0.63
0.54
0.50
0.40
0.28
0.58
0.35
0.54
0.68
0.83
0.68
0.43
0.60
0.51
0.61
0.64
0.49
0.59
0.59
0.64
0.18
Mean
Median
Weighted Average
0.76
0.78
0.48
0.51
0.54
0.54
0.58
0.62
0.53
0.51
0.54
0.57
0.54
0.59
0.50
Value Line
c
Value
Line
d
Zacks
e
Standard
& Poor's
Average
g
Company's
Tax
Relevered Beta based on 46% Debt Capital Structure and Mean Unlevered Beta
f
3
Relevered Beta based on 46% Debt Capital Structure and Weighted Average Unlevered Beta
i
Unlevered
2
Beta
0.82
3
0.76
Sources: Columns a, c and g were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from Standard and Poor's Stock Reports.
1
Average Debt to Equity Ratio over the last five years.
2
Unlevered Beta = Beta/[1+(1-tc)(D/E)]; where D/E is the debt to equity ratio, tc is the company's most recent tax rate.
3
Relevered Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the debt to equity ratio, tp is a prospective purchaser's tax rate (assumed to be 40%).
Page 28
2016 Capitalization Rate Study
Water Utility Companies
Value Line
Rating
A
Equity
Flotation
Recommended
Rate
Cost in %
9.43%
4.50%
Rate
Moody's
Rating
9.87%
Not Rated
Cost of Capital Adjusted for Flotation Costs =
ku
1-f
Where: ku = The cost of capital unadjusted for flotation costs
f = Flotation cost as a percentage of the value of securities issued
Page 29
Debt
Recommended Flotation
Rate
Cost in %
4.73%
1.70%
Rate
4.81%
2016 Capitalization Rate Study
Water Utility Companies
Summary of Rates of Return
Common Equity
Value Line
1
Bonds
Rate of
1
Moody's
Rate of
Rating
Return
Rating
Return
A
9.43%
Not Rated
4.73%
In developing the Rate of Return on Common Equity, staff considered the latest decision of the California Public Utilities Commission and
other pertinent information. For 2016, the return on equity and return on rate base for Golden State Water Company are 9.43% and 8.34%,
respectively (D.12-07-009).
Page 30
2016 Capitalization Rate Study
Water Utility Companies
Capital Asset Pricing Model - Ex Ante
Value Line Ratings
A, B++, B+
Component
Expected Future Return, S&P 500
Less: Risk Free Return - Long-Term Treasury Rates
10.80%
1
2.78%
Beta
8.02%
2
0.68
5.47%
Risk Free Return - Long-Term Treasury Rates 1
2.78%
Projected Return on Equity
8.25%
1
US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 31, 2015
2
The estimated betas were derived from a sample of water companies with similar ratings.
Page 31
2016 Capitalization Rate Study
Water Utility Companies
Capital Asset Pricing Model - Ex Post
Value Line Ratings
A, B++, B+
Component
Common Stock Returns, S&P 500 (1928 - 2015) 1
Less: 10 Year Treasury Bonds (1928 - 2015)
11.41%
1
5.23%
6.18%
Beta 2
0.68
Risk Free Return - Long-Term Treasury Rates
4.22%
3
2.78%
Projected Return on Equity
7.00%
1
Damodaran Online, January 6, 2016
2
The estimated betas were derived from a sample of water companies with similar ratings.
3
US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 31, 2015
Page 32
2016 Capitalization Rate Study
Water Utility Companies
Equity Rates
a
b
Value Line
Rating
Company
Name
A
A
B++
B++
B+
B+
American States Water Co.
Aqua America, Inc.
California Water Service Group
Middlesex Water Company
American Water Works Co., Inc.
York Water Co.
c
d
e
f
g
h
i
j
Est.
Est.
Dividend
Est.
Est.
Stock
Price
2016
2015
2015
2016
Yield Dividend Earnings
12/31/15 Earnings Earnings Dividends Dividends (g/c)
Growth Growth
41.95
29.80
23.27
26.54
59.75
24.94
1.70
1.35
1.35
1.25
2.80
1.00
1.60
1.25
1.15
1.20
2.60
0.90
0.87
0.69
0.67
0.77
1.33
0.60
Mean
Median
Weighted Average
0.92
0.76
0.70
0.78
1.45
0.63
l
DvYld+
DvGrth
(h+i)
m
DvYld+
ErngsGr
(h+j)
2.19%
2.55%
3.01%
2.94%
2.43%
2.53%
7.50%
9.50%
7.00%
2.00%
8.50%
6.50%
5.00%
6.37%
5.50%
5.00%
7.40%
6.50%
4.05%
4.53%
5.80%
4.71%
4.69%
4.01%
9.69%
12.05%
10.01%
4.94%
10.93%
9.03%
7.19%
8.92%
8.51%
7.94%
9.83%
9.03%
2.61%
2.54%
6.83%
7.25%
5.96%
5.93%
4.63%
4.61%
9.44%
9.85%
10.92%
8.57%
8.71%
9.29%
Sources: Columns a, d, e, f, g and i were extracted from Value Line.
Column j represents the average estimated earnings growth extracted from Value Line, Zacks.com and ThomsonReuters.com.
Column c was acquired from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Page 33
k
E/P
Ratio
(d/c)
2016 Capitalization Rate Study
Water Utility Companies
Long Term Earnings Growth
a
Value Line
Rating
A
A
B++
B++
B+
B+
b
Company Name
c
d
e
f
Value Line
Zacks
Thomson
Average
American States Water Co.
Aqua America, Inc.
California Water Service Group
Middlesex Water Company
American Water Works Co., Inc.
York Water Co.
6.00%
7.50%
6.50%
5.00%
7.00%
6.50%
5.00%
6.00%
5.00%
N/A
7.50%
N/A
4.00%
5.60%
5.00%
N/A
7.70%
N/A
5.00%
6.37%
5.50%
5.00%
7.40%
6.50%
Mean
Median
Weighted Average
6.42%
6.50%
5.88%
5.50%
5.58%
5.30%
5.96%
5.93%
6.81%
Sources: Columns a and c were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from ThomsonReuters.com.
Page 34
2016 Capitalization Rate Study
Water Utility Companies
Capital Structure
a
b
Value Line
Rating
Company Name
A
A
B++
B++
B+
B+
American States Water Co.
Aqua America, Inc.
California Water Service Group
Middlesex Water Company
American Water Works Co., Inc.
York Water Co.
c
Common
Stock
Outstanding
37,240,678
176,805,350
47,878,659
16,164,099
180,256,635
12,866,946
d
e
f
g
h
i
Common Mkt Value
L.T.
Pfd
Common
Total
Stock Price Equity
Debt
Stock
Equity
Capital
12/31/15 (\$million) (\$million) (\$million) (\$million) (\$million)
41.95
29.80
23.27
26.54
59.75
24.94
1,562.25
5,268.80
1,114.14
429.00
10,770.33
320.90
325.60
1,660.50
416.80
136.10
5,433.20
84.80
0.00 1,562.25 1,887.85
0.00 5,268.80 6,929.30
0.00 1,114.14 1,530.94
2.40
429.00
567.50
14.30 10,770.33 16,217.83
0.00
320.90
405.70
Mean
Median
Weighted Average
Sources: Columns a, c, f and g were extracted from Value Line.
Column d was acquired from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Page 35
j
L.T.
Debt
%
k
Pfd
Stock
%
l
Common
Equity
%
17.25%
23.96%
27.23%
23.98%
33.50%
20.90%
0.00%
0.00%
0.00%
0.42%
0.09%
0.00%
82.75%
76.04%
72.77%
75.59%
66.41%
79.10%
24.47%
23.97%
29.26%
0.09%
0.00%
0.06%
75.44%
75.82%
70.68%
2016 Capitalization Rate Study
Water Utility Companies
Beta Analysis
a
b
Value Line
Rating
Company Name
c
Value
Line
d
Zacks
e
Standard
& Poor's
f
g
Company's
Average
Tax
Beta
Beta
Beta
Beta
Rate
h
Debt
Equity
Ratio1
i
Unlevered
Beta2
A
American States Water Co.
0.70
0.50
0.67
0.62
0.38
0.32
0.52
A
Aqua America, Inc.
0.75
0.44
0.44
0.54
0.08
0.37
0.40
B++
California Water Service Group
0.75
0.59
0.63
0.66
0.28
0.47
0.49
B++
Middlesex Water Company
0.75
0.61
0.71
0.69
0.35
0.40
0.55
B+
American Water Works Co., Inc.
0.70
0.22
0.29
0.40
0.40
0.70
0.28
B+
York Water Co.
0.75
0.56
0.51
0.61
0.28
0.29
0.50
Mean
Median
Weighted Average
0.73
0.75
0.49
0.53
0.54
0.57
0.59
0.62
0.48
0.43
0.39
0.57
0.46
0.50
0.35
Relevered Beta based on 45% Debt Capital Structure and Mean Unlevered Beta 3
Relevered Beta based on 45% Debt Capital Structure and Weighted Average Unlevered Beta
0.68
3
0.52
Sources: Columns a, c and g were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from Standard and Poor's Stock Reports.
1
Average Debt to Equity Ratio over the last five years.
2
Unlevered Beta = Beta/[1+(1-tc)(D/E)]; where D/E is the debt to equity ratio, tc is the company's most recent tax rate.
3
Relevered Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the debt to equity ratio, tp is a prospective purchaser's tax rate (assumed to be 40%).
Page 36
California State Board of Equalization
State-Assessed Properties Division
2016 Capitalization Rate Study
Natural Gas Transmission Companies
Ratings
SBE No.
Company Name
Capital Structure
Common
Rates of Return
Common
Basic
Cap
Financial
Bond
Equity
Debt
Equity
Debt
Rate
153
Transwestern Pipeline Company
Not Rated
Not Rated
75%
25%
12.04%
5.68%
10.45%
180
North Baja Pipeline, LLC
Not Rated
Not Rated
75%
25%
12.04%
5.68%
10.45%
187
Mojave Pipeline Company, LLC
Not Rated
Not Rated
75%
25%
12.04%
5.68%
10.45%
188
Kern River Gas Transmission Company
Not Rated
Not Rated
75%
25%
12.04%
5.68%
10.45%
189
Standard Pacific Gas Line, Incorporated
Not Rated
Not Rated
75%
25%
12.04%
5.68%
10.45%
190
Tuscarora Gas Transmission Company
Not Rated
Not Rated
75%
25%
12.04%
5.68%
10.45%
196
Questar Southern Trails Pipeline Company
Not Rated
Not Rated
75%
25%
12.04%
5.68%
10.45%
197
El Paso Natural Gas Company, LLC
Not Rated
Not Rated
75%
25%
12.04%
5.68%
10.45%
Page 37
2016 Capitalization Rate Study
Natural Gas Transmission Companies
Industry Notes
•
Interstate gas transmission companies are regulated by the Federal Energy Regulatory Commission (FERC).
•
Staff relied upon the results of the following models in the development of equity rates:
1. Discounted Cash Flow
2. Capital Asset Pricing Model – (Ex Post and Ex Ante)
Page 38
2016 Capitalization Rate Study
Natural Gas Transmission Companies
Value Line
Rating
Not Rated
Equity
Recommended
Flotation
Rate
Cost in %
11.50%
4.50%
Rate
Moody's
Rating
Debt
Recommended
Rate
Flotation
Cost in %
Rate
12.04%
Not Rated
5.58%
1.70%
5.68%
Cost of Capital Adjusted for Flotation Costs =
ku
1-f
Where: ku = The cost of capital unadjusted for flotation costs
f = Flotation cost as a percentage of the value of securities issued
Staff applied a bond rating of Baa for the Natural Gas Transmission Companies, which represents the estimated cost of debt for the
companies in the study.
Page 39
2016 Capitalization Rate Study
Natural Gas Transmission Companies
Comparison of Return on Common Equity
Description
2016
2015
Change
E/P Ratio - Mean
E/P Ratio - Median
5.33%
6.78%
6.63%
5.34%
-1.31%
1.44%
Dividends Yield + Dividends Growth - Mean
Dividends Yield + Dividends Growth - Median
9.19%
8.86%
8.00%
7.80%
1.20%
1.06%
Dividends Yield + Earnings Growth - Mean
Dividends Yield + Earnings Growth - Median
7.61%
7.79%
10.29%
9.60%
-2.68%
-1.81%
Capital Asset Pricing Model (CAPM) - Ex Ante
11.64%
13.36%
-1.71%
Capital Asset Pricing Model (CAPM) - Ex Post
9.61%
10.64%
-1.03%
State-Assessed Properties Division Recommendation:
11.50%
11.50%
0.00%
The Discounted Cash Flow (DCF) model is computed using data from a sample of gas transmission companies with similar risk and operations.
The information considered by staff includes the results of DCF analysis (Dividends Yield + Dividends Growth and Dividends Yield + Earnings
Growth) and the results of the Capital Asset Pricing Model (CAPM) analysis.
Page 40
2016 Capitalization Rate Study
Natural Gas Transmission Companies
Equity Rates
a
b
Value Line
Rating
Company Name
A
B++
B++
Questar Corp.
Devon Energy Corp.
National Fuel Gas Co.
c
d
Stock
2016
Price
Est.
12/31/15 Earnings
19.48
32.00
42.75
1.32
0.70
3.00
e
f
g
h
i
j
2016
Dividend
Est.
Est.
2015
2015
Est.
Yield
Dividend Earnings
Earnings Dividends Dividends (g/c)
Growth
Growth
1.25
2.52
4.50
0.84
0.96
1.56
Mean
Median
Weighted Average
0.92
0.96
1.65
l
m
Div Yld+ Div Yld+
Div Grwh Engs Grwh
(h+i)
(h+j)
4.72%
3.00%
3.86%
7.50%
3.50%
5.00%
3.97%
3.33%
3.93%
6.78%
2.19%
7.02%
12.22%
6.50%
8.86%
8.69%
6.33%
7.79%
3.86%
3.86%
5.33%
5.00%
3.74%
3.93%
5.33%
6.78%
9.19%
8.86%
7.62%
7.61%
7.79%
6.87%
Sources: Columns a, d, e, f, g and i were extracted from Value Line.
Column c was extracted from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Column j is an average of Value Line, Zacks.com and ThomsonReuters.com.
Page 41
k
E/P
Ratio
(d/c)
2016 Capitalization Rate Study
Natural Gas Transmission Companies
Long Term Earnings Growth
a
Value Line
Rating
A
B++
B++
b
c
d
e
f
Company Name
Value Line
Zacks
Thomson
Average
Questar Corp.
Devon Energy Corp.
National Fuel Gas Co.
6.00%
6.00%
6.00%
4.00%
6.60%
2.90%
1.90%
-2.60%
2.90%
3.97%
3.33%
3.93%
Mean
Median
Weighted Average
6.00%
6.00%
4.50%
4.00%
0.73%
1.90%
3.74%
3.93%
3.51%
Sources: Columns a, b and c were extracted from the Value Line Investment Survey Reports.
Column d was extracted from Zacks.com.
Column e was extracted from ThomsonReuters.com.
Page 42
2016 Capitalization Rate Study
Natural Gas Transmission Companies
Capital Asset Pricing Model - Ex Ante
Component
Industry Computation
Expected Future Return, S&P 500
Less: Risk Free Return - Long-Term Treasury Rates 1
Relevered Beta
10.80%
2.78%
8.02%
1.11
8.86%
Risk Free Return - Long-Term Treasury Rates 1
2.78%
Projected Return on Equity
1
11.64%
US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 31, 2015
Page 43
2016 Capitalization Rate Study
Natural Gas Transmission Companies
Capital Asset Pricing Model - Ex Post
Component
Industry Computation
Common Stock Returns, S&P 500 (1928-2015) 1
Less: 10 Year Treasury Bonds (1928-2015) 1
Relevered Beta
11.41%
5.23%
6.18%
1.11
6.83%
Risk Free Return - Long-Term Treasury Rates 2
2.78%
Projected Return on Equity
9.61%
1
Damodaran Online, January 6, 2016
2
US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 31, 2015
Page 44
2016 Capitalization Rate Study
Natural Gas Transmission Companies
Beta Analysis
a
b
Value Line
Rating
Company Name
A
Questar Corp.
B++
Devon Energy Corp.
B++
National Fuel Gas Co.
Mean
Median
Weighted
c
Value
Lines
Beta
0.85
1.35
1.10
d
Zacks
Beta
0.58
1.72
1.44
e
Standard
& Poor's
Beta
0.00
1.29
1.49
1.10
1.10
1.25
1.44
0.93
1.29
f
Average
Beta
0.48
1.45
1.34
g
Company's
Tax
Rate
0.35
0.50
0.46
1.09
1.34
1.31
Relevered Beta based on 25% Debt Capital Structure
1.00
3
Relevered Beta based on 25% Debt Capital Structure and a weighted average Beta
1.11
3
h
Debt
Equity
Ratio 1
i
Unlevered
Beta 2
0.33
1.02
0.32
0.39
0.96
1.15
0.56
0.33
0.81
0.83
0.96
0.92
Sources: Column a, b, c and g were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from Standard and Poor's Stock Reports.
1
Average Debt to Equity Ratio over the last five years.
2
Unlevered Beta = Corrected Beta/[1+(1-tc)(D/E)]; where D/E is the debt to equity ratio, tc is the company's 2015 tax rate.
3
Relevered Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the debt to equity ratio, tp is a prospective purchaser's tax rate (assumed to be 40%).
Page 45
2016 Capitalization Rate Study
Natural Gas Transmission Companies
Capital Structure
a
b
c
d
Moody's
Value Line
Rating
Bond
Rating
P/S
Rating
A
B++
B++
NR
NR
NR
NR
NR
NR
Company Name
Questar Corp.
Devon Energy Corp.
National Fuel Gas Co.
e
f
g
h
i
j
k
l
Common
Common
Market Value
L.T.
Common
Total
L.T.
Common
Stock
Outstanding
Stock Price
12/31/15
Equity
(\$million)
Debt
(\$million)
Equity
(\$million)
Capital
(\$million)
Debt
%
Equity
%
174,846,306
411,000,000
84,633,992
19.48
32.00
42.75
22.80%
46.40%
36.50%
77.20%
53.60%
63.50%
35.23%
36.50%
41.77%
64.77%
63.50%
58.23%
3,406.01
13,152.00
3,618.10
1,004.40
11,400.00
2,084.00
3,406.01
13,152.00
3,618.10
4,410.41
24,552.00
5,702.10
Mean
Median
Weighted Average
Recommended Capital Structure for Natural Gas Transmission Companies for lien date January 1, 2016:
The results of the above Capital Structure analysis are a reflection of a drop in oil prices and should not
be reflected in the transportation of natural gas.
Sources: Columns a, e and h were extracted from Value Line.
Column f was extracted from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
NR - Not Rated
Page 46
Debt Equity -
25%
75%
2016 Capitalization Rate Study
Natural Gas Transmission Companies
Bonds - Rate of Return
Utility Bond Yield
Aaa
Aa
Bond Rating
A
Baa
Avg Utility
As of December 31, 2015
N/A
4.21%
4.41%
5.58%
4.73%
Source: Moody's Daily Long-Term Corporate Bond Yield Averages as of December 31, 2015.
Page 47
California State Board of Equalization
State-Assessed Properties Division
2016 Capitalization Rate Study
Electric Generation Facilities
Ratings
Facility Type
Financial
Capital Structure
Common
Equity
Debt
Bond
Rates of Return
Common
Equity
Debt
Basic
Cap
Rate3
Modern Electric Generation Technology 1
B
B2
60%
40%
13.61%
7.12%
11.02%
Older Electric Generation Technology 2
B
B2
60%
40%
15.71%
8.14%
12.68%
1
Modern Electric Generation Technology - Generally high efficiency combined-cycle or simple cycle gas turbine electric generation facilities incorporating
contemporary generation technologies.
2
Older Electric Generation Technology - Generally older steam turbine electric generation facilities that were sold off by vertically integrated electric utilities and for
which no replacements, other than for routine maintenance, have been made.
3
Staff may adjust the rates stated above if the specific situation of a facility warrants an adjustment to its basic capitalization rate.
Page 48
2016 Capitalization Rate Study
Electric Generation Facilities
Industry Notes
• Staff relied primarily on the Capital Asset Pricing Model (CAPM) and Risk Premium Analysis in the development of equity rates.
Consideration was given to both the ex post and ex ante risk premiums.
• The Discounted Cash Flow Model was not relied upon because not all of the merchant generators in the sample are currently
paying dividends.
• Staff's recommended capital structure of 60% equity and 40% debt provides sufficient coverage of interest and principal payments
on debt.
• Staff added a risk premium of 100 basis points to the debt rate for older technology to recognize the market’s perception of
additional risk present in operating these types of facilities.
• Staff considers the risk associated with older facilities to be greater than that of newer facilities, and has adjusted the beta used in
the CAPM calculation upward to reflect this additional risk.
• The following company was removed from the 2016 Capitalization Rate Study sample for electric generation companies:
1. Atlantic Power is no longer rated by Value Line.
• The following company was added to the 2016 Capitalization Rate Study sample for electric generation companies:
1.
Dynegy, Inc. as a result of it emerging from bankruptcy.
Page 49
2016 Capitalization Rate Study
Electric Generation Facilities
Facility
Type
Equity
Recommended Flotation
Rate
Cost in %
Rate
Recommended
Rate
Debt
Flotation
Cost in %
Rate
Modern Electric Generation Technology 1
13.00%
4.50%
13.61%
7.00%
1.70%
7.12%
Older Electric Generation Technology 2
15.00%
4.50%
15.71%
8.00%
1.70%
8.14%
Cost of Capital Adjusted for Flotation Costs =
ku
1-f
Where: ku = The cost of capital unadjusted for flotation costs
f = Flotation cost as a percentage of the value of securities issued
1
The Modern Electric Generation Technology Recommended Debt Rate was developed by staff based on the relative rates of the utilities and
other pertinent information from various sources.
2
The Older Electric Generation Technology Recommended Debt Rate is equal to the Modern Electric Generation Technology Recommended
Page 50
2016 Capitalization Rate Study
Electric Generation Facilities
Summary of Rates of Return
Common Equity
Moody's Bond
Bonds
Moody's
Rate of
1
Yields
Rating
Return 2
Modern Electric Generation Technology
13.00%
Aaa=NA
Older Electric Generation Technology
15.00%
Facility
Type
Rate of
Return
Aa=4.21%
A=4.41%
Baa=5.58%
Aaa2
Aaa3
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
3.53%
3.75%
3.98%
4.21%
4.28%
4.34%
4.41%
4.80%
5.19%
5.58%
5.72%
5.86%
6.00%
6.14%
6.28%
6.42%
6.56%
6.70%
1
The Rate of Return on Common Equity was developed by staff based on the relative risk of the utilities in conjunction with the results of the various financial
models and pertinent information from various sources.
2
Rates of Return on Bonds are based on Moody's "Utility Bond Yields" as of December 31, 2015. However, because Moody's assigns a yield to the groups Aa,
A and Baa for bonds, the staff interpolates the difference between these groups in order to achieve a further refinement of the ratings.
Page 51
2016 Capitalization Rate Study
Electric Generation Facilities
Comparison of Rates of Return on Common Equity
E/P Ratio-Mean
E/P Ratio-Median
2016
6.31%
5.99%
Div Yld + Div Growth-Mean
Div Yld + Div Growth-Median
Div Yld + Div Growth-Weighted Avg.
10.82%
9.79%
11.34%
8.07%
8.51%
9.66%
2.75%
1.28%
1.68%
Div Yld + Earn.Growth-Mean
Div Yld + Earn.Growth-Median
Div Yld + Earn.Growth-Weighted Avg.
9.60%
8.52%
9.66%
14.26%
8.71%
11.32%
-4.66%
-0.19%
-1.66%
Merrill Lynch Industry Factor - Required Return IPPs
11.60%
9.60%
2.00%
ROE% - Yahoo Finance - Utilities
11.80%
7.93%
3.87%
ROE% - Yahoo Finance - Electric Utilities
9.50%
5.30%
4.20%
ROE% - Yahoo Finance - Diversified Utilities
11.80%
8.20%
3.60%
2015 Recommended Rate
CAPM - Ex Ante
CAPM - Ex Post
1
2016 Recommended Rate
1
All Facilities in Study
2015
Change
2.26%
4.05%
5.57%
0.42%
Modern
Technology
Older
Technology
12.50%
14.50%
11.20%
9.27%
13.30%
13.21%
10.81%
14.32%
13.00%
15.00%
Risk Premium Analysis estimates the market indicated cost of equity by adding the appropriate "risk premium" to the
corresponding cost of debt. "Risk Premium" of 6.18% is determined by comparing the Damodaran Online total return
on large company stocks to the total return on long-term corporate bonds.
Page 52
2016 Capitalization Rate Study
Electric Generation Facilities
Capital Asset Pricing Model - Ex Ante
Types of Facilities
Component
Modern Technology
Older Technology
10.80%
10.80%
2.78%
2.78%
8.02%
8.02%
1.05
1.30
8.42%
10.43%
2.78%
2.78%
11.20%
13.21%
Expected Future Return, S&P 500
Less: Risk Free Return - Long-Term Treasury Rates
1
Beta
2
Risk Free Return - Long-Term Treasury Rates
1
Projected Return on Equity
1
US Department of the Treasury - Composite Long-Term Rates >10 yrs, December 31, 2015
2
The betas are based on staff's judgment in conjunction with the results of the Beta Analysis. See explanation contained in the Industry Notes.
Page 53
2016 Capitalization Rate Study
Electric Generation Facilities
Capital Asset Pricing Model - Ex Post
Types of Facilities
Component
Modern Technology
Older Technology
11.41%
11.41%
5.23%
5.23%
6.18%
6.18%
Beta 2
1.05
1.30
6.49%
8.03%
2.78%
2.78%
9.27%
10.81%
Common Stock Returns, S&P 500 (1928 - 2015) 1
Less: 10 Year Treasury Bonds (1928 - 2015)
1
Risk Free Return - Long-Term Treasury Rates
3
Projected Return on Equity
1
Damodaran Online, January 6, 2016
2
The betas are based on staff's judgment in conjunction with the results of the Beta Analysis. See explanation contained in the Industry Notes.
3
US Department of the Treasury - Composite Long-Term Rates >10 yrs, December 31, 2015
Page 54
2016 Capitalization Rate Study
Electric Generation Facilities
Equity Rates
a
b
Value Line
Rating
Company Name
c
Stock
Price
12/31/15
B+
B+
B
C++
Merchant Generators
Calpine Corp.
NRG Energy, Inc.
AES Corp.
Dynegy, Inc
A
A
A
Diversified Electric Utilities
Duke Energy Corp.
NextEra Energy, Inc.
Xcel Energy Inc.
d
Est.
2016
Earnings
e
f
2015
Earnings
g
h
Est.
Dividend
2015
2016
Yield
Dividends Dividends
(g/c)
i
Est.
Dividend
Growth
j
Est.
Earnings
Growth
k
E/P
Ratio
(d/c)
l
DvYld+
DvGrth
(h+i)
m
DvYld+
ErngsGrth
(h+j)
14.47
11.77
9.57
13.40
0.80
0.60
1.05
0.54
0.65
-0.25
0.95
0.69
0.00
0.58
0.40
0.00
0.00
0.62
0.44
0.00
0.00%
5.27%
4.60%
0.00%
0.00%
13.50%
20.00%
0.00%
7.63%
18.85%
2.90%
0.00%
5.53%
5.10%
10.97%
4.03%
0.00%
18.77%
24.60%
0.00%
7.63%
24.12%
7.50%
0.00%
71.39
103.89
35.91
4.65
6.30
2.15
4.30
6.05
2.05
3.24
3.08
1.28
3.36
3.50
1.36
4.71%
3.37%
3.79%
3.50%
11.00%
6.00%
4.13%
7.23%
4.73%
6.51%
6.06%
5.99%
8.21%
14.37%
9.79%
8.84%
10.60%
8.52%
3.10%
3.79%
7.71%
6.00%
6.50%
4.73%
6.31%
5.99%
10.82%
9.79%
11.34%
9.60%
8.52%
9.66%
Mean
Median
Weighted Average
Merrill Lynch Required Return - Independent Power Producers & Energy Traders
Sources: Columns a, b, d, e, f, g and i were extracted from Value Line.
Column c was extracted from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Column j represents the average estimated earnings growth extracted from Value Line, Zacks.com and ThomsonReuters.com.
Page 55
11.60%
2016 Capitalization Rate Study
Electric Generation Facilities
Long Term Earnings Growth
a
Value Line
Rating
b
c
d
e
f
Company Name
Value Line
Zacks
Thomson
Average
B+
B+
B
C++
Merchant Generators
Calpine Corp.
NRG Energy, Inc.
AES Corp.
Dynegy, Inc
4.50%
23.50%
8.00%
NMF
16.70%
NMF
1.90%
NMF
1.70%
14.20%
-1.20%
-66.30%
7.63%
18.85%
2.90%
0.00%
A
A
A
Diversified Electric Utilities
Duke Energy Corp.
NextEra Energy, Inc.
Xcel Energy Inc.
5.00%
7.50%
4.50%
4.10%
7.10%
5.00%
3.30%
7.10%
4.70%
4.13%
7.23%
4.73%
8.83%
6.25%
6.96%
5.00%
-5.21%
3.30%
6.50%
4.73%
6.34%
Mean
Median
Weighted Average
Merrill Lynch 5 Year Growth Estimate - Independent Power Producers & Energy Traders
Sources: Columns a, b and c were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from ThomsonReuters.com.
Page 56
36.80%
2016 Capitalization Rate Study
Electric Generation Facilities
Capital Structure
a
Value
Line
Rating
b
Company Name
B+
B+
B
C++
Merchant Generators
Calpine Corp.
NRG Energy, Inc.
AES Corp.
Dynegy, Inc
c
Common
Stock
Outstanding
d
e
Common Mkt Value
Stock Price
Equity
12/31/2015 (\$million)
366,837,359
334,589,672
682,721,956
123,182,927
14.47
11.77
9.57
13.40
5,308.14
3,938.12
6,533.65
1,650.65
f
L.T.
Debt
(\$million)
11,465.00
19,598.00
18,398.00
7,208.00
g
Pfd
Stock
(\$million)
0.00
249.00
0.00
400.00
h
Common
Equity
(\$million)
5,308.14
3,938.12
6,533.65
1,650.65
i
Total
Capital
(\$million)
16,773.14
23,785.12
24,931.65
9,258.65
Mean
Median
Weighted Average
A
A
A
Diversified Electric Utilities
Duke Energy Corp.
NextEra Energy, Inc.
Xcel Energy Inc.
688,334,378
460,535,906
507,211,342
71.39
103.89
35.91
49,140.19
47,845.08
18,213.96
37,667.00
25,604.00
11,896.00
0.00
0.00
0.00
49,140.19
47,845.08
18,213.96
Mean
Median
Weighted Average
Damodaran Online - Power Industry
Damodaran Online - Utility (General) Industry
Fidelity.com Research Independent Power Producers & Energy Traders
Fidelity.com Research Electric Utilities
86,807.19
73,449.08
30,109.96
j
L.T.
Debt
%
k
Pfd
Stock
%
l
Common
Equity
%
m
Debt
Equity
Ratio
68.35%
82.40%
73.79%
77.85%
0.00%
1.05%
0.00%
4.32%
31.65%
16.56%
26.21%
17.83%
2.16
4.68
2.82
3.51
75.60%
75.82%
75.81%
1.34%
0.52%
0.87%
23.06%
22.02%
23.32%
3.29
3.17
3.35
43.39%
34.86%
39.51%
0.00%
0.00%
0.00%
56.61%
65.14%
60.49%
0.77
0.54
0.65
39.25%
39.51%
39.49%
0.00%
0.00%
0.00%
60.75%
60.49%
60.51%
0.65
0.65
0.66
45.5%
41.4%
0.0%
0.0%
54.5%
58.7%
0.83
0.71
2.83
1.31
Sources: Columns a, b, c, f and g were extracted from Value Line.
Column d was extracted from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Page 57
2016 Capitalization Rate Study
Electric Generation Facilities
Beta Analysis
a
b
Value
Line
Rating
c
d
Value
Company Name
e
f
Standard
g
h
Company
Debt
i
Line
Beta
Zacks
Beta
& Poor's
Beta
Average
Beta
Tax
Rate
Equity
Ratio 1
Unlevered
Beta 2
Merchant Generators
B+
Calpine Corp.
1.00
0.92
0.72
0.88
0.16
1.48
0.41
B+
NRG Energy, Inc.
1.00
0.75
0.72
0.82
0.00
2.53
0.26
B
AES Corp.
1.15
1.23
1.23
1.20
0.25
2.18
0.50
C++
Dynegy, Inc
1.15
1.60
NMF
1.38
0.00
3.51
0.34
1.07
1.04
1.03
0.10
0.08
0.12
2.43
0.38
0.37
0.38
Mean
Median
Weighted
Diversified Electric Utility
A
Duke Energy Corp.
0.65
0.03
0.14
0.27
0.33
0.64
0.19
A
NextEra Energy, Inc.
0.75
0.39
0.34
0.49
0.31
0.63
0.34
A
Xcel Energy Inc.
0.65
0.13
0.23
0.34
0.35
0.69
0.23
Mean
Median
Weighted
0.68
0.65
0.18
0.13
0.24
0.23
0.37
0.34
0.37
0.33
0.33
0.32
0.65
0.26
0.23
0.26
Merchant Generators Relevered Beta based on 40% Debt Capital Structure
Diversified Electric Utilities Relevered Beta based on 40% Debt Capital Structure
Damodaran Online - Cost of Capital by Sector - Power Industry Beta
0.54
0.36
1.05
0.80
3
3
Sources: Columns a, b, c and g were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from Standard and Poor's Stock Reports.
1
Average Debt to Equity Ratio over the last five years.
2
Unlevered Beta = Corrected Beta/[1+(1-tc)(D/E)]; where D/E is the debt to equity ratio, tc is the company's 2015 tax rate.
3
Relevered Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the debt to equity ratio, tp is a prospective purchaser's tax rate (assumed to be 40%).
Page 58
California State Board of Equalization
State-Assessed Properties Division
2016 Capitalization Rate Study
Telecommunications Companies
Ratings
SBE No.
Company Name
Rates of Return
Common
Equity
Debt
Basic
Cap
Rate
Financial
Bond
A++
A++
B
C++
A2
A3
Not Rated
Not Rated
70%
70%
65%
65%
30%
30%
35%
35%
11.94%
11.94%
12.98%
15.34%
4.49%
4.88%
5.94%
6.21%
9.70%
9.82%
10.52%
12.14%
Not Rated
Not Rated
65%
35%
15.34%
6.21%
12.14%
A++
A++
A++
A++
A++
B
C++
A2
A3
A3
A3
A3
Not Rated
B3
70%
70%
70%
70%
70%
65%
65%
30%
30%
30%
30%
30%
35%
35%
11.41%
11.41%
11.41%
11.41%
11.41%
12.72%
14.55%
4.49%
4.88%
4.88%
4.88%
4.88%
6.21%
7.53%
9.34%
9.45%
9.45%
9.45%
9.45%
10.44%
12.10%
Other Wireless Companies1
Not Rated
Not Rated
55%
45%
16.65%
9.05%
13.23%
Wireless Reseller Companies
Not Rated
Not Rated
55%
45%
18.74%
9.56%
14.61%
A++
A++
A++
B++
C++
C++
A2
A3
A3
Baa3
B3
Caa2
70%
70%
70%
65%
60%
60%
30%
30%
30%
35%
40%
40%
12.72%
12.72%
12.72%
14.29%
16.65%
16.65%
4.49%
4.88%
4.88%
5.94%
7.53%
9.05%
10.25%
10.37%
10.37%
11.37%
13.00%
13.61%
Other Interexchange Carriers
Not Rated
Not Rated
55%
45%
21.36%
9.05%
15.82%
Other Interexchange Resellers
Not Rated
Not Rated
55%
45%
24.50%
9.56%
17.78%
Local Exchange Companies
279
Pacific Bell Telephone Company
201
Verizon California, Inc.
284
Frontier Communications
294
SureWest Telephone
Other Local Exchange Companies
Wireless Companies
2606
AT&T Mobility LLC
2532
Los Angeles SMSA Ltd., Partnership
2552
Fresno MSA Limited Partnership
2559
Cellco Partnership
2669
California RSA #4 Partnership
2748
T-Mobile West, LLC
2720
Sprint Telephony PCS, L.P.
Interexchange Companies
2310
AT&T Communications
2274
MCI Communications Services, Inc.
2372
MCI Metro Access Transmission Services, LLC
2463
2014
Sprint Communications Company, L.P.
7761
Level 3 Communications, LLC
1
Capital Structure
Common
Equity
Debt
Includes Radio Telephone and Paging Companies
Page 59
2016 Capitalization Rate Study
Telecommunications Companies
Industry Notes
•
Staff conducted a consolidated capitalization rate study for the local exchange, wireless, and interexchange industries due to
the increasing convergence of these three industries. Separate capitalization rates were estimated for the companies in each of
the three industries based on the relative risk experienced by each group of companies within their respective industries.
•
Staff relied on the Discounted Cash Flow Model (DCF) and Capital Asset Pricing Model (CAPM Ex Post and Ex Ante) in the
development of equity rates.
•
NTELOS was removed from the Capitalization Rate Study sample in 2016 as it was removed by Value Line in 2015.
•
Windstream Holdings, Inc. was removed from the Capitalization Rate Study sample in 2016 due to lack of data from various
sources used for the study.
Page 60
2016 Capitalization Rate Study
Telecommunications Companies - Local Exchange
Recommended
Rate
Equity
Flotation
Cost in %
Rate
Moody's
Rating
A++
11.40%
4.50%
11.94%
Aa2
4.21%
1.70%
4.28%
B
12.40%
4.50%
12.98%
Aa3
4.28%
1.70%
4.35%
C++
14.65%
4.50%
15.34%
A1
4.34%
1.70%
4.42%
Other Local Exchange Companies
14.65%
4.50%
15.34%
A2
4.41%
1.70%
4.49%
A3
4.80%
1.70%
4.88%
Baa1
5.19%
1.70%
5.28%
Baa2
5.58%
1.70%
5.68%
Baa3
5.84%
1.70%
5.94%
Not Rated
6.10%
1.70%
6.21%
Value Line
Rating
Cost of Capital Adjusted for Flotation Costs =
ku
1-f
Where: ku = The cost of capital unadjusted for flotation costs
f = Flotation cost as a percentage of the value of securities issued
Page 61
Debt
Recommended
Flotation
Rate
Cost in %
Rate
2016 Capitalization Rate Study
Telecommunications Companies - Wireless
Value Line
Rating
Recommended
Rate
Equity
Flotation
Cost in %
Rate
Moody's
Rating
10.90%
12.15%
13.90%
15.90%
17.90%
4.50%
4.50%
4.50%
4.50%
4.50%
11.41%
12.72%
14.55%
16.65%
18.74%
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Not Rated
Not Rated
A++
B
C++
Other Wireless Companies1
Wireless Reseller Companies
Cost of Capital Adjusted for Flotation Costs =
ku
1-f
Where: ku = The cost of capital unadjusted for flotation costs
f = Flotation cost as a percentage of the value of securities issued
1
Includes Radio Telephone and Paging Companies
Page 62
Debt
Recommended
Flotation
Rate
Cost in %
4.21%
4.28%
4.34%
4.41%
4.80%
5.19%
5.58%
5.84%
6.10%
6.36%
6.62%
6.88%
7.14%
7.40%
8.90%
9.40%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
Rate
4.28%
4.35%
4.42%
4.49%
4.88%
5.28%
5.68%
5.94%
6.21%
6.47%
6.73%
7.00%
7.26%
7.53%
9.05%
9.56%
2016 Capitalization Rate Study
Telecommunications Companies - Interexchange
Value Line
Rating
A++
B++, B
C++
Other Interexchange Carriers
Other Interexchange Resellers
Cost of Capital Adjusted for Flotation Costs =
Recommended
Rate
Equity
Flotation
Cost in %
Rate
Moody's
Rating
12.15%
13.65%
15.90%
20.40%
23.40%
4.50%
4.50%
4.50%
4.50%
4.50%
12.72%
14.29%
16.65%
21.36%
24.50%
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Not Rated
Not Rated
ku
1-f
Where: ku = The cost of capital unadjusted for flotation costs
f = Flotation cost as a percentage of the value of securities issued
Page 63
Debt
Recommended
Flotation
Rate
Cost in %
4.21%
4.28%
4.34%
4.41%
4.80%
5.19%
5.58%
5.84%
6.10%
6.36%
6.62%
6.88%
7.14%
7.40%
8.90%
9.40%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
1.70%
Rate
4.28%
4.35%
4.42%
4.49%
4.88%
5.28%
5.68%
5.94%
6.21%
6.47%
6.73%
7.00%
7.26%
7.53%
9.05%
9.56%
2016 Capitalization Rate Study
Telecommunications Companies
Comparison of Return on Common Equity
A++
Description
B++, B+, B
C++, C+
2016
2015
Change
2016
2015
Change
2016
2015
Change
8.45%
8.45%
8.16%
8.16%
0.29%
0.29%
3.20%
2.14%
1.76%
2.43%
1.44%
-0.29%
-12.43%
2.78%
0.29%
3.09%
-12.72%
-0.31%
Dividend Yield + Dividend Growth - Mean
Dividend Yield + Dividend Growth - Median
Weighted Average (Div. Yield + Div. Growth)
7.55%
7.55%
7.58%
8.19%
8.19%
8.05%
-0.64%
-0.64%
-0.46%
6.37%
8.16%
4.76%
4.35%
5.13%
3.63%
2.02%
3.03%
1.13%
1.85%
0.00%
0.22%
1.39%
0.00%
5.57%
0.46%
0.00%
-5.35%
Dividend Yield + Earnings Growth - Mean
Dividend Yield + Earnings Growth - Median
Weighted Average (Div. Yield + Earn. Growth)
11.68%
11.68%
11.63%
12.21%
12.21%
12.33%
-0.53%
-0.53%
-0.69%
11.63%
9.50%
12.51%
10.07%
11.49%
10.05%
1.56%
-1.99%
2.45%
16.15%
16.80%
17.20%
11.36%
10.93%
23.57%
4.79%
5.87%
-6.37%
7.59%
6.49%
7.79%
6.50%
-0.20%
-0.01%
9.20%
7.72%
9.05%
7.44%
0.15%
0.29%
10.80%
8.96%
11.07%
8.94%
-0.27%
0.02%
11.40%
10.90%
12.15%
11.55%
11.05%
12.30%
-0.15%
-0.15%
-0.15%
12.40%
12.15%
13.65%
12.55%
12.30%
13.80%
-0.15%
-0.15%
-0.15%
14.65%
13.90%
15.90%
14.80%
14.05%
16.05%
-0.15%
-0.15%
-0.15%
Discounted Cash Flow Analysis
E/P Ratio - Mean
E/P Ratio - Median
CAPM Analysis
Ex Ante
Ex Post
Recommended Rates
Local Exchange
Wireless
Interexchange
Page 64
2016 Capitalization Rate Study
Telecommunications Companies
Equity Rates
a
b
Value Line
Rating
Company
Name
A++
A++
AT&T Inc.
Verizon Communications
c
Stock
Price
12/31/15
d
Est.
2016
Earnings
e
2015
Earnings
34.41
46.22
2.80
4.05
2.70
3.96
f
g
h
Est.
Dividend
2015
2016
Yield
Dividends Dividends
(g/c)
1.88
2.23
1.92
2.32
Mean
Median
Weighted Average
B++
B++
B+
B
B
B
B
Atlantic Tele-Network, Inc.
U.S. Cellular
Frontier Communications
Shenandoah Telecom
T-Mobile US, Inc.
Telephone & Data Systems
78.23
25.16
40.81
4.67
43.05
39.12
25.89
2.90
2.40
0.10
0.10
0.90
1.60
0.15
2.10
2.55
2.45
0.05
0.78
0.80
1.70
1.19
2.16
0.00
0.42
0.24
0.00
0.56
Mean
Median
Weighted Average
1.30
2.16
0.00
0.42
0.26
0.00
0.58
j
Est.
Earnings
Growth
k
E/P
Ratio
(d/c)
l
DivYld+
DivGrw
(h+i)
m
DivYld+
ErngsGrw
(h+j)
5.58%
5.02%
2.50%
2.00%
5.30%
7.47%
8.14%
8.76%
8.08%
7.02%
10.88%
12.49%
5.30%
5.30%
2.25%
2.25%
6.38%
6.38%
8.45%
8.45%
7.55%
7.55%
7.58%
11.68%
11.68%
11.63%
1.66%
8.59%
0.00%
8.99%
0.60%
0.00%
2.24%
6.50%
0.00%
0.00%
2.50%
9.50%
0.00%
4.00%
7.00%
2.10%
3.75%
17.45%
15.50%
9.50%
4.00%
3.71%
9.54%
0.25%
2.14%
2.09%
4.09%
0.58%
8.16%
8.59%
0.00%
11.49%
10.10%
0.00%
6.24%
8.66%
10.69%
3.75%
26.44%
16.10%
9.50%
6.24%
3.15%
1.66%
3.21%
2.50%
8.47%
7.00%
3.20%
2.14%
6.37%
8.16%
4.76%
11.63%
9.50%
12.51%
Sources: Columns a, d, e, f, g and i were extracted from Value Line.
Column c was extracted from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Column j is an average of Value Line, Zacks.com, and ThomsonReuters.com.
Page 65
i
Est.
Dividend
Growth
2016 Capitalization Rate Study
Telecommunications Companies
Equity Rates
a
b
Value Line
Rating
Company
Name
C++
C++
C++
C+
Consolidated Communications
Level 3 Communications, Inc.
Sprint Corporation
Cincinnati Bell
c
Stock
Price
12/31/15
d
Est.
2016
Earnings
e
2015
Earnings
20.95
54.36
3.62
3.60
0.75
2.35
-0.45
0.10
0.05
1.75
-0.40
0.05
f
g
h
Est.
Dividend
2015
2016
Yield
Dividends Dividends
(g/c)
1.55
0.00
0.00
0.00
Mean
Median
Weighted Average
1.55
0.00
0.00
0.00
j
Est.
Earnings
Growth
k
E/P
Ratio
(d/c)
l
DivYld+
DivGrw
(h+i)
m
DivYld+
ErngsGrw
(h+j)
7.40%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
15.65%
28.00%
10.55%
3.00%
3.58%
4.32%
-12.43%
2.78%
7.40%
0.00%
0.00%
0.00%
23.05%
28.00%
10.55%
3.00%
1.85%
0.00%
0.00%
0.00%
14.30%
13.10%
-0.44%
3.18%
1.85%
0.00%
0.22%
16.15%
16.80%
17.20%
Sources: Columns a, d, e, f, g and i were extracted from Value Line.
Column c was extracted from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Column j is an average of Value Line, Zacks.com, and ThomsonReuters.com.
Page 66
i
Est.
Dividend
Growth
2016 Capitalization Rate Study
Telecommunications Companies
Long Term Earnings Growth
a
Value Line
Rating
A++
A++
B++
B++
B+
B
B
B
B
b
c
d
e
f
Company Name
Value Line
Zacks
Thomson
Average
AT&T Inc.
Verizon Communications
5.50%
8.00%
4.50%
6.80%
5.90%
7.60%
5.30%
7.47%
Mean
Median
Weighted Average
6.75%
6.75%
5.65%
5.65%
6.75%
6.75%
6.38%
6.38%
6.32%
Atlantic Tele-Network, Inc.
U.S. Cellular
Frontier Communications
Shenandoah Telecom
T-Mobile US, Inc.
Telephone & Data Systems
7.00%
9.50%
4.50%
26.00%
15.50%
NMF
4.00%
NMF
-1.70%
3.00%
8.90%
NMF
9.50%
NMF
NMF
-1.50%
NMF
NMF
NMF
NMF
NMF
7.00%
2.10%
3.75%
17.45%
15.50%
9.50%
4.00%
Mean
Median
Weighted Average
11.08%
8.25%
4.93%
5.95%
-1.50%
-1.50%
8.47%
7.00%
8.58%
Sources: Columns a and c were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from ThomsonReuters.com.
Page 67
2016 Capitalization Rate Study
Telecommunications Companies
Long Term Earnings Growth
a
Value Line
Rating
C++
C++
C++
C+
b
c
d
e
f
Company Name
Value Line
Zacks
Thomson
Average
Consolidated Communications
Level 3 Communications, Inc.
Sprint Corporation
Cincinnati Bell
25.50%
NMF
NMF
NMF
5.80%
8.00%
16.10%
3.00%
NMF
48.00%
5.00%
3.00%
15.65%
28.00%
10.55%
3.00%
Mean
Median
Weighted Average
25.50%
25.50%
8.23%
6.90%
18.67%
5.00%
14.30%
13.10%
16.98%
Sources: Columns a and c were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from ThomsonReuters.com.
Page 68
2016 Capitalization Rate Study
Telecommunications Companies
Capital Structure
a
b
Value Line
Rating
Company
Name
A++
A++
AT&T Inc.
Verizon Communications
c
Common
Stock
Outstanding
6,152,000,000
4,068,873,137
d
e
Common Market Value
Stock Price
Equity
12/31/15
(\$million)
34.41
46.22
211,690.32
188,063.32
f
Long Term
Debt
(\$million)
g
Preferred
Stock
(\$million)
119,395.00
105,060.00
0.00
0.00
h
Common
Stock
(\$million)
i
Total
Capital
(\$million)
j
L.T
Debt
%
211,690.32
188,063.32
331,085.32
293,123.32
36.06%
35.84%
0.00%
0.00%
63.94%
64.16%
35.95%
35.95%
35.96%
0.00%
0.00%
0.00%
64.05%
64.05%
64.04%
2.19%
57.26%
28.46%
74.59%
8.11%
43.48%
43.97%
0.00%
0.00%
0.00%
0.00%
0.00%
0.04%
0.02%
97.81%
42.74%
71.54%
25.41%
91.89%
56.49%
56.02%
36.86%
43.48%
50.84%
0.01%
0.00%
0.02%
63.13%
56.49%
49.15%
Mean
Median
Weighted Average
B++
B++
B+
B
B
B
B
Atlantic Tele-Network, Inc.
U.S. Cellular
Frontier Communications
Shenandoah Telecom
T-Mobile US, Inc.
Telephone & Data Systems
16,062,167
549,004,205
84,287,521
1,168,212,000
48,444,866
816,037,384
108,760,881
78.23
25.16
40.81
4.67
43.05
39.12
25.89
1,256.54
13,812.95
3,439.77
5,455.55
2,085.55
31,923.38
2,815.82
28.10
18,504.00
1,368.70
16,016.00
184.00
24,570.00
2,210.00
0.00
0.00
0.00
0.02
0.00
20.00
0.80
Mean
Median
Weighted Average
Sources: Columns a, c, f, and g were extracted from Value Line.
Column d was extracted from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Page 69
1,256.54
13,812.95
3,439.77
5,455.55
2,085.55
31,923.38
2,815.82
1,284.64
32,316.95
4,808.47
21,471.57
2,269.55
56,513.38
5,026.62
k
l
Preferred Common
Stock
Stock
%
%
2016 Capitalization Rate Study
Telecommunications Companies
Capital Structure
a
b
Value Line
Rating
Company
Name
C++
C++
C++
C+
Consolidated Communications
Level 3 Communications, Inc.
Sprint Corporation
Cincinnati Bell
c
Common
Stock
Outstanding
50,509,148
356,267,100
3,969,872,033
209,863,805
d
e
Common Market Value
Stock Price
Equity
12/31/15
(\$million)
20.95
54.36
3.62
3.60
f
Long Term
Debt
(\$million)
g
Preferred
Stock
(\$million)
1,406.30
10,997.00
32,570.00
1,236.30
0.00
0.00
0.00
129.40
1,058.17
19,366.68
14,370.94
755.51
Mean
Median
Weighted Average
Sources: Columns a, c, f, and g were extracted from Value Line.
Column d was extracted from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Page 70
h
Common
Stock
(\$million)
1,058.17
19,366.68
14,370.94
755.51
i
Total
Capital
(\$million)
j
L.T
Debt
%
k
l
Preferred Common
Stock
Stock
%
%
2,464.47
30,363.68
46,940.94
2,121.21
57.06%
36.22%
69.39%
58.28%
0.00%
0.00%
0.00%
6.10%
42.94%
63.78%
30.61%
35.62%
55.24%
57.67%
56.43%
1.53%
0.00%
0.16%
43.24%
53.36%
43.41%
2016 Capitalization Rate Study
Telecommunications Companies
Capital Asset Pricing Model - Ex Ante
A++
Value Line Rating
B++, B+, B
C++, C+
Expected Future Return, S&P 500
10.80%
10.80%
10.80%
Less: Risk Free Return - 10 Year Treasury Bonds1
2.78%
2.78%
2.78%
8.02%
8.02%
8.02%
0.60
0.80
1.00
4.81%
6.42%
8.02%
Risk Free Return - 10 Year Treasury Bonds1
2.78%
2.78%
2.78%
Projected Return on Equity
7.59%
9.20%
10.80%
Component
Beta 2
1
2
US Department of Treasury - Composite Long-Term Rates > 10 yrs, December 31, 2015
The estimated betas were derived from a representative sample of telecommunications companies with similar ratings.
Page 71
2016 Capitalization Rate Study
Telecommunications Companies
Capital Asset Pricing Model - Ex Post
A++
Value Line Rating
B++, B+, B
C++, C+
Common Stock Return, S&P 500 (1928-2015)1
11.41%
11.41%
11.41%
Less: 10 Year Treasury Bonds (1928-2015)1
5.23%
5.23%
5.23%
6.18%
6.18%
6.18%
0.60
0.80
1.00
3.71%
4.94%
6.18%
Risk Free Return - 10 Year Treasury Bonds3
2.78%
2.78%
2.78%
Projected Return on Equity
6.49%
7.72%
8.96%
Component
Beta 2
1
Damodaran Online, January 6, 2016
The estimated betas were derived from a representative sample of telecommunications companies with similar ratings.
3
US Department of Treasury - Composite Long Term Rates > 10 yrs, December 31, 2015
2
Page 72
2016 Capitalization Rate Study
Telecommunications Companies
Beta Analysis
a
b
Value Line
Rating
Company Name
A++
A++
B++
B++
B+
B
B
B
B
c
Value
Line
Beta
d
e
f
Average
Beta
g
Company's
Tax
Rate
h
Debt
Equity
Ratio
Zacks
Beta
Thomson
Beta
AT&T Inc.
Verizon Communications
0.75
0.75
0.35
0.31
Mean
Median
Weighted Average
0.75
0.75
Atlantic Tele-Network, Inc.
U.S. Cellular
Frontier Communications
Shenandoah Telecom.
T-Mobile US, Inc.
Telephone & Data Systems
Unlevered
Beta 1
0.72
0.74
0.61
0.60
0.34
0.35
0.40
0.51
0.48
0.45
0.33
0.33
0.73
0.73
0.60
0.60
0.60
0.45
0.45
0.45
0.47
0.47
0.47
0.95
0.90
1.05
1.05
1.10
1.00
1.20
0.88
0.80
0.59
0.72
1.46
1.09
1.14
0.68
0.97
0.91
1.04
1.03
0.72
1.06
0.84
0.89
0.85
0.94
1.20
0.94
1.13
0.19
1.01
0.29
1.91
0.40
1.57
0.65
0.76
0.53
0.71
0.42
0.97
0.43
0.79
Mean
Median
Weighted Average
1.04
1.05
0.95
0.88
0.92
0.97
0.97
0.94
0.93
0.86
0.65
1.36
0.66
0.71
0.49
0.43
0.32
0.33
0.35
0.41
0.25
0.33
Sources: Columns a, c, and g were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from ThomsonReuters.com.
Column h is a 5-year average Debt to Equity Ratio, where historical information is available.
1
Unlevered Beta = Average Beta/[1+(1-tc)(D/E)]; where D/E is the debt to equity ratio, tc is the company's most recent tax rate.
Page 73
i
2016 Capitalization Rate Study
Telecommunications Companies
Beta Analysis
a
b
Value Line
Rating
Company Name
C++
C++
C++
C+
c
Value
Line
Beta
d
e
f
Average
Beta
g
Company's
Tax
Rate
h
Debt
Equity
Ratio
Zacks
Beta
Thomson
Beta
Consolidated Communications
Level 3 Communications
Sprint Nextel
Cincinnati Bell
0.75
1.15
1.30
1.15
0.93
1.80
0.36
1.32
Mean
Median
Weighted Average
1.09
1.15
1.10
1.13
Unlevered
Beta 1
0.86
1.11
1.08
1.29
0.85
1.35
0.91
1.25
0.37
0.40
0.40
0.35
1.46
1.52
1.70
2.95
0.44
0.71
0.45
0.43
1.09
1.10
1.09
1.08
1.08
1.91
1.61
1.66
0.51
0.45
0.55
A++
A++:
B++, B+, B:
C++, C+, C:
Sources:
B++, B+, B
C++, C+, C
---------
---------
2
Relevered beta based on 30% debt capital structure
Relevered beta based on 30% debt capital structure and a weighted average beta
0.58
0.59
Relevered beta based on 35% debt capital structure
Relevered beta based on 35% debt capital structure and a weighted average beta
---------
0.87
0.65
Relevered beta based on 40% debt capital structure
Relevered beta based on 40% debt capital structure and a weighted average beta
---------
---------
2
2
2
--------0.71
0.76
Columns a, c, and g were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from ThomsonReuters.com.
Column h is a 5-year average Debt to Equity Ratio, where historical information is available.
1
Unlevered Beta = Average Beta/[1+(1-tc)(D/E)]; where D/E is the debt to equity ratio, tc is the company's most recent tax rate.
2
Relevered Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the debt to equity ratio, tp is the prospective purchaser's tax rate (assumed to be 40%).
Page 74
i
2
2
California State Board of Equalization
State-Assessed Properties Division
2016 Capitalization Rate Study
Pipeline Companies
Ratings
SBE No.
Company Name
Financial
Bond
Capital Structure
Common
Equity
Debt
Equity
Debt
Basic
Cap
Rate
Rates of Return
402
461
Calnev Pipe Line LLC.
SFPP, L.P.
NR-1
NR-1
NR-b
NR-b
65%
65%
35%
35%
13.61%
13.61%
5.60%
5.60%
10.81%
10.81%
479
480
486
492
Chevron Pipe Line Company
Phillips 66 Pipeline LLC
Pacific Pipeline System LLC
San Pablo Bay Pipeline Company LLC
NR-2
NR-2
NR-2
NR-2
NR-b
NR-b
NR-b
NR-b
65%
65%
65%
65%
35%
35%
35%
35%
14.14%
14.14%
14.14%
14.14%
5.60%
5.60%
5.60%
5.60%
11.15%
11.15%
11.15%
11.15%
Other Pipeline Companies
NR-3
NR-c
65%
35%
15.18%
6.61%
12.18%
Page 75
2016 Capitalization Rate Study
Pipeline Companies
Industry Notes
•
Staff considered both the Capital Asset Pricing Model (CAPM Ex Post and Ex Ante) and the Discounted Cash Flow Model
(DCF) in the development of equity rates. Staff relied primarily on the Discounted Cash Flow model in the development of
equity rates.
•
Magellan Midstream Partners, L. P. was added to the Capitalization Rate Study as staff determined that its capital structure
was representative of a typical oil pipeline company.
Page 76
2016 Capitalization Rate Study
Pipeline Companies
Value Line
Rating
NR-1
NR-2
NR-3
Equity
Recommended
Flotation Cost
Rate
in %
13.00%
13.50%
14.50%
4.50%
4.50%
4.50%
Rate
13.61%
14.14%
15.18%
Moody's
Rating
Debt
Recommended
Rate
NR-b
NR-c
5.50%
6.50%
Flotation Cost
in %
Rate
1.70%
1.70%
5.60%
6.61%
Cost of Capital Adjusted for Flotation Costs =
ku
1-f
Where: ku = The cost of capital unadjusted for flotation costs
f = Flotation cost as a percentage of the value of securities issued
NR-1: Not-Rated-1 pipelines are not directly traded because they are subsidiaries of larger companies. These are larger common carrier
pipelines transmitting refined petroleum products.
NR-2: Not-Rated-2 pipelines are not directly traded because they are subsidiaries of larger companies. These are larger common carrier
pipelines transmitting crude oil.
NR-3: Not-Rated-3 pipelines are smaller companies transporting petroleum products or crude oil.
NR-b: Although these companies do not have rated debt securities, the rating class "Baa" was chosen to represent these subsidiaries of
larger corporations.
NR-c: Issues of this size are not normally rated. An additional increment of 100 basis points (before flotation costs) has been added to
the "Baa" rate.
Page 77
2016 Capitalization Rate Study
Pipeline Companies
Comparison of Return on Common Equity
Description
2016
2015
Change
E/P Ratio - Mean
4.61%
3.49%
1.12%
E/P Ratio - Median
5.00%
3.55%
1.45%
Dividend Yield + Dividend Growth - Mean
13.09%
12.03%
1.06%
Dividend Yield + Dividend Growth - Median
12.82%
10.50%
2.32%
Dividend Yield + Earnings Growth - Mean
13.30%
17.39%
-4.09%
Dividend Yield + Earnings Growth - Median
13.22%
17.73%
-4.51%
Capital Asset Pricing Model (CAPM) - Ex Ante
8.90%
8.68%
0.22%
Capital Asset Pricing Model (CAPM) - Ex Post
7.49%
7.16%
0.33%
13.00%
12.00%
1.00%
State-Assessed Properties Division Recommendation:
Page 78
2016 Capitalization Rate Study
Pipeline Companies
Equity Rates
a
b
Value Line
Rating
Company Name
c
Stock
Price
d
e
12/31/15
2015
Earnings
2015
Dividends
f
g
2016
2016
Dividend
Est Div ¹
Yield
h
2016
Hist. Div
Growth
i
2016
Avg. Erns
Growth
j
E/P
Ratio
(d/c)
k
l
Div Yld+ Div Yld+
Div Gwth Erns Gwth
(g+h)
(g+i)
B++
Enbridge Energy Partners, L.P.
23.07
0.95
2.20
1.21
5.24%
2.50%
12.40%
4.12%
7.74%
17.64%
B++
Kinder Morgan, Inc.
14.92
0.55
1.90
0.50
3.35%
9.00%
5.13%
3.69%
12.35%
8.48%
B++
Magellan Midstream Partners, L.P.
67.92
3.50
2.90
3.25
4.79%
13.00%
8.43%
5.15%
17.79%
13.22%
B+
Buckeye Partners, L.P.
65.96
3.30
4.63
4.83
7.32%
5.50%
8.10%
5.00%
12.82%
15.42%
B+
Enterprise Products Partners, L.P.
25.58
1.30
1.51
1.60
6.25%
8.50%
5.47%
5.08%
14.75%
11.72%
7.70%
8.50%
7.91%
8.10%
4.61%
5.00%
13.09%
12.82%
13.30%
13.22%
Mean
Median
Weighted Average
11.37%
Sources: Columns a, b, d, e, f and h were extracted from the Value Line (with the exception of column f for Kinder Morgan, Inc., as explained in note 1).
Column c was extracted from the Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Column i is an average of Value Line, Zacks.com, and ThomsonReuters.com.
1
Kinder Morgan, Inc's, 2016 estimated dividend is extracted from Zacks.com, due to Kinder Morgan announcing a change in dividend payout
after the Value Line analysis but prior to the end of 2015.
Page 79
2016 Capitalization Rate Study
Pipeline Companies
Long Term Earnings Growth
a
Value Line
Rating
B++
B++
B++
B+
B+
b
c
Company Name
Value Line
Enbridge Energy Partners, L.P.
Kinder Morgan, Inc.
Magellan Midstream Partners, L.P.
Buckeye Partners, L.P.
Enterprise Products Partners, L.P.
Mean
Median
Weighted Average
Sources:
e
f
Zacks
Thomson
Average
-18.00%
13.00%
10.50%
9.50%
9.00%
26.90%
-1.50%
7.70%
10.80%
3.70%
28.30%
3.90%
7.10%
4.00%
3.70%
12.40%
5.13%
8.43%
8.10%
5.47%
4.80%
9.50%
9.52%
7.70%
9.40%
24.20%
7.91%
8.10%
6.39%
Columns a, b, and c were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from ThomsonReuters.com.
Page 80
d
2016 Capitalization Rate Study
Pipeline Companies
Capital Asset Pricing Model - Ex Ante
Industry Computation
Component
Expected Future Return, S&P 500
10.80%
1
Less: Risk Free Return - Long-Term Treasury Rates
2.78%
8.02%
Relevered Beta2
Risk Free Return - Long-Term Treasury Rates1
0.76
6.12%
2.78%
Projected Return on Equity
8.90%
1
US Department of the Treasury - Composite Long - Term Rates > 10yrs, December 31, 2015
2
Weighted average using betas from Value Line, Zacks.com, and Standard & Poor's for a representative sample of pipeline companies.
Page 81
2016 Capitalization Rate Study
Pipeline Companies
Capital Asset Pricing Model - Ex Post
Component
Industry Computation
Common Stock Return, S&P 500 (1928 - 2015)1
Less: Risk Free Return - Long-Term Treasury Rates (1928 - 2015)1
11.41%
5.23%
6.18%
Relevered Beta2
0.76
4.71%
Risk Free Return - Long-Term Treasury Rates3
2.78%
Projected Return on Equity
7.49%
1
Damodaran Online, January 5, 2016
2
Weighted average using betas from Value Line, Zacks.com, and Standard & Poor's for a representative sample of pipeline companies.
3
US Department of the Treasury - Composite Long-Term Rates > 10yrs, December 31, 2015
Page 82
2016 Capitalization Rate Study
Pipeline Companies
Beta Analysis
a
b
Value Line
Rating
Company Name
c
Value
Line
Beta
d
f
g
Zacks
Beta
e
Standard
& Poor's
Beta
Tax
Rate
h
Debt
Equity
Ratio
Average
Beta
i
Unlevered
Beta 1
B++
Enbridge Energy Partners, L.P.
0.90
0.91
0.55
0.79
0.40
0.73
0.55
B++
Kinder Morgan, Inc.
1.00
0.84
0.63
0.82
0.20
1.25
0.47
B++
Magellan Midstream Partners, L.P.
0.90
0.68
0.55
0.71
0.40
0.22
0.63
B+
Buckeye Partners, L.P.
0.85
0.89
0.60
0.78
0.40
0.43
0.62
B+
Enterprise Products Partners, L.P.
1.00
0.86
0.65
0.84
0.40
0.41
0.67
Mean
Median
Weighted Average
0.93
0.90
0.84
0.86
0.60
0.60
0.79
0.79
0.81
0.36
0.40
0.61
0.43
0.74
0.59
0.62
0.58
Relevered beta based on 35% Debt Capital Structure
0.78
2
Relevered beta based on 35% Debt Capital Structure and a weighted average beta
0.76
2
Sources: Columns a, b, and c were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from ThomsonReuters.com.
1
Unlevered Beta = Beta/[1+(1-t)(D/E)]; where D/E is the debt to equity ratio, t is the tax rate (assumed to be 40%)
2
Relevered Beta = [Unlevered Beta][1+(1-t)(D/E)]; where D/E is the debt to equity ratio, t is the tax rate (assumed to be 40%)
Page 83
2016 Capitalization Rate Study
Pipeline Companies
Capital Structure
a
b
Value Line
Rating
Moody
Bond
Rating
B++
B++
B++
B+
B+
NR
NR
NR
NR
NR
c
Company Name
Enbridge Energy Partners, L.P.
Kinder Morgan, Inc.
Magellan Midstream Partners, L.P.
Buckeye Partners, L.P.
Enterprise Products Partners, L.P.
Total
d
Partnership
Units
Outstanding
(\$million)
e
Unit
Price
12/31/15
425,992.00
2,231,514.70
227,427.20
128,836.30
2,005,753.80
23.07
14.92
67.92
65.96
25.58
f
Market
Value
Equity
(\$million)
g
Long Term
Debt
(\$million)
9,827.64
33,294.20
15,446.86
8,498.04
51,307.18
118,373.91
7,169.80
41,600.00
3,407.10
3,632.80
20,840.70
76,650.40
Mean
Median
Weighted Average
Recommended Capital Structure for Common Carrier Pipelines for lien date January 1, 2016:
Debt Equity -
Sources: Columns a, d, and g were extracted from the Value Line Investment Survey Reports.
Column e was extracted from the Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Page 84
35%
65%
h
i
j
Total
Capital
(\$million)
Long Term
Debt
%
Equity
%
16997.44
74894.20
18853.96
12130.84
72147.88
195024.31
42.18%
55.55%
18.07%
29.95%
28.89%
57.82%
44.45%
81.93%
70.05%
71.11%
34.93%
29.95%
39.30%
65.07%
70.05%
60.70%
2016 Capitalization Rate Study
Pipeline Companies
Debt Yield Rate
Average of Industrial and Public Utility Bond Yield:
Aa
Industrial/Utility Average
4.22%
A
Industrial/Utility Average
4.44%
Baa
4.22%
Aa
4.44%
A
Industrial/Utility Average
5.50%
Recommended
5.50%
Baa/Ba
Public
Bond Rating
Industrial
Utility
Average
Aaa
4.04%
N/A
4.04%
Aa
4.23%
4.21%
4.22%
A
4.46%
4.41%
4.44%
Baa
5.42%
5.58%
5.50%
Source: Moody's Daily Long-Term Corporate Bond Yield Averages as of December 31, 2015.
Page 85
California State Board of Equalization
State-Assessed Properties Division
2016 Capitalization Rate Study
SBE
No.
Company
Name
Financial
Bond
Capital Structure
Common
Equity
Debt
Rates of Return
Common
Equity
Debt
Basic
Cap
Rate
804
BNSF Railway Company
A++
Baa2
80%
20%
13.61%
5.60%
12.01%
843
A++
Baa2
80%
20%
13.61%
5.60%
12.01%
802
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
810
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
813
Pacific Harbor Lines
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
822
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
826
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
850
Modesto & Empire Traction Company
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
865
San Diego & Imperial Valley Railroad Co. Inc.
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
878
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
882
Trona Railway Co.
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
897
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
899
NR-1
NR-1
60%
40%
15.71%
7.12%
12.27%
NR-2
NR-2
60%
40%
15.97%
8.14%
12.84%
Page 86
2016 Capitalization Rate Study
Industry Notes
•
Staff relied upon the results of the following models in the development of equity rates:
1. Discounted Cash Flow Model
2. Capital Asset Pricing Model – ex post and ex ante
Page 87
2016 Capitalization Rate Study
Equity
Value
Line
Rating
Debt
Recommended
Rate
Flotation
Cost
in %
Rate
Moody's
Rating
Recommended
Rate
Flotation
Cost
in %
Rate
A++
13.00%
4.50%
13.61%
Baa2
5.50%
1.70%
5.60%
NR-1
15.00%
4.50%
15.71%
NR-11
7.00%
1.70%
7.12%
NR-2
15.25%
4.50%
15.97%
NR-22
8.00%
1.70%
8.14%
Cost of Capital Adjusted for Flotation Costs =
ku
1-f
Where: ku = The cost of capital unadjusted for flotation costs
f = Flotation cost as a percentage of the value of securities issued
1
NR-1: Represents short line railroad companies with stable historical income. An additional 150 basis points were added to the
2
NR-2: Represents short line railroad companies without stable historical income patterns. An additional 250 basis points were
Page 88
2016 Capitalization Rate Study
Comparison of Return on Common Equity
Description
2016
2015
Change
E/P Ratio - Mean
7.83%
5.93%
1.90%
E/P Ratio - Median
8.06%
5.93%
2.13%
Dividend Yield + Dividend Growth - Mean
13.46%
12.46%
1.00%
Dividend Yield + Dividend Growth - Median
14.93%
13.26%
1.67%
Dividend Yield + Earnings Growth - Mean
10.03%
13.34%
-3.31%
Dividend Yield + Earnings Growth - Median
10.23%
12.99%
-2.76%
Capital Asset Pricing Model - Ex Post
9.55%
9.73%
-0.18%
Capital Asset Pricing Model - Ex Ante
11.56%
12.14%
-0.58%
State-Assessed Properties Division Recommendation:
13.00%
12.25%
0.75%
Page 89
2016 Capitalization Rate Study
Equity Rates
a
b
c
d
e
f
g
h
i
j
k
l
m
Value
Line
Rating
Company
Name
Stock
Price
12/31/15
Est.
Earnings
2016
Earnings
2015
Dividends
2015
Est.
Dividends
2016
Div Yield
2016
(g/c)
Value Line
Dividend
Est Gwth
Average
Est Erns
Gwth
E/P
Ratio
(d/c)
Div Yld +
Dv Gwth
(h+i)
Div Yld +
Erns Gwth
(h+j)
A++
Union Pacific Corp.
78.20
6.30
5.65
2.15
2.40
3.07%
13.00%
8.50%
8.06%
16.07%
11.57%
A
Norfolk Southern Corp.
84.59
6.05
5.40
2.36
2.44
2.88%
6.50%
5.40%
7.15%
9.38%
8.28%
B++
CSX Corp.
25.95
2.15
2.00
0.70
0.76
2.93%
12.00%
7.30%
8.29%
14.93%
10.23%
Mean
2.96%
10.50%
7.07%
7.83%
13.46%
10.03%
Median
2.93%
12.00%
7.30%
8.06%
14.93%
10.23%
14.27%
10.50%
Weighted Average
Sources: Columns a, d, e, f, g and i were extracted from Value Line.
Column c was extracted from Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Column j is an average of Value Line, Zacks.com and ThomsonReuters.com.
Page 90
2016 Capitalization Rate Study
Long Term Earnings Growth
a
Value
Line
Rating
b
c
d
e
f
Company Name
Value
Line
Zacks
Thomson
Average
A++
Union Pacific Corp.
10.00%
8.50%
7.00%
8.50%
A
Norfolk Southern Corp.
8.00%
7.40%
0.80%
5.40%
B++
CSX Corp.
11.00%
5.40%
5.50%
7.30%
Mean
9.67%
7.10%
4.43%
7.07%
Median
10.00%
7.40%
5.50%
7.30%
Weighted Average
Sources:
7.51%
Columns a and c were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from ThomsonReuters.com.
Page 91
2016 Capitalization Rate Study
Capital Asset Pricing Model - Ex Ante
Industry Computation
Component
Expected Future Return, S&P 500
Less: Risk Free Return - Long-Term Treasury Rates
10.80%
1
2.78%
8.02%
Relevered Beta
1.10
Risk Free Return - Long-Term Treasury Rates 1
8.78%
2.78%
Projected Return on Equity
1
11.56%
US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 31, 2015
Page 92
2016 Capitalization Rate Study
Capital Asset Pricing Model - Ex Post
Industry Computation
Component
Common Stock Returns, S&P 500 (1928 - 2015) 1
11.41%
Less: 10 Year Treasury Bonds (1928 - 2015) 1
5.23%
6.18%
Relevered Beta
1.10
6.77%
Risk Free Return - Long-Term Treasury Rates 2
2.78%
Projected Return on Equity
9.55%
1
Damodaran Online, January 6, 2016
2
US Department of Treasury - Composite Long -Term Rates > 10 yrs, December 31, 2015
Page 93
2016 Capitalization Rate Study
Beta Analysis
a
Value
Line
Rating
b
Company Name
A++
Union Pacific Corp.
A
Norfolk Southern Corp.
B++
CSX Corp.
Mean
Median
Weighted Average
c
Value
Line
Beta
d
e
f
Average
Beta
g
Company's
Tax
Rate
h
Debt
Equity
Ratio 1
Zacks
Beta
Thomson
Beta
1.05
1.05
1.15
0.99
1.17
1.32
1.08
1.05
1.16
1.17
Unlevered
Beta 2
1.11
0.96
1.17
1.05
1.06
1.21
0.38
0.38
0.38
0.15
0.32
0.35
0.96
0.88
1.00
1.08
1.11
1.11
1.06
1.09
0.27
0.32
0.23
0.95
0.96
0.95
0.35
1.17
0.35
0.35
0.35
1.17
1.17
1.17
Relevered Beta based on 20% Debt Capital Structure
1.09
3
Relevered Beta based on 20% Debt Capital Structure and a weighted average Beta
1.10
3
i
B+
Genesee & Wyoming
1.30
1.64
1.34
1.43
Mean
Median
Weighted Average
1.30
1.30
1.64
1.64
1.34
1.34
1.43
1.43
1.43
0.38
Relevered Beta based on 40% Debt Capital Structure
1.64
3
Relevered Beta based on 40% Debt Capital Structure and a weighted average Beta
1.64
3
Sources: Columns a, c, and g were extracted from Value Line.
Column d was extracted from Zacks.com.
Column e was extracted from ThomsonReuters.com.
1
Average debt-to-equity ratio over the last five years.
2
Unlevered Beta = Corrected Beta/[1+(1-tc)(D/E)]; where D/E is the debt-to-equity ratio, tc is the company's 2015 tax rate.
3
Relevered Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the debt-to-equity ratio, tp is a prospective purchaser's tax rate (assumed to be 40%).
Page 94
2016 Capitalization Rate Study
Capital Structure
a
b
Value
Line
Rating
Moody's
Bond
Rating
A++
A
B++
NR
NR
NR
c
d
e
f
g
h
i
j
Company Name
Common
Stock
Outstanding
(\$million)
Common
Stock
Price
12/31/15
Market
Value
Equity
(\$million)
Long Term
Debt
(\$million)
Total
Capital
(\$million)
Long Term
Debt
%
Common
Equity
%
854
298
975
78.20
84.59
25.95
66,783
25,208
25,301
12,798
8,896
10,088
79,581
34,104
35,389
16.08%
26.09%
28.51%
83.92%
73.91%
71.49%
23.56%
26.09%
21.32%
76.44%
73.91%
78.68%
42.38%
57.62%
42.38%
42.38%
42.38%
57.62%
57.62%
57.62%
Union Pacific Corp.
Norfolk Southern Corp.
CSX Corp.
Total
149,074
Mean
Median
Weighted Average
B+
NR
Genesee & Wyoming
Total
57
53.69
3,060
Mean
Median
Weighted Average
Recommended Capital Structures for lien date January 1, 2016
Sources:
Equity
80%
60%
Debt
20%
40%
Columns a, d, and g were extracted from Value Line.
Column e was extracted from the Finance.Yahoo.com and represents December 31, 2015 closing stock prices.
Page 95
2,251
5,311
5,311
2016 Capitalization Rate Study
Yield Increment from Moody's Average Bond Ratings
a
Moody's Average Rating
b
Moody's Average Bond Yield
Aa = Aa2
4.22%
A = A2
4.44%
Difference
0.22%
A = A2
4.44%
Baa = Baa2
5.50%
Difference
1.06%
c
Number of
Increments
d
Incremental Increase
(b/c)
3
0.07%
3
0.35%
c
Incremental Increase
d
Interpolated Bond Yield
a
Moody's Average Rating
Aa2
b
Moody's Average Bond Yield
4.220%
4.22%
Aa3
0.07%
4.29%
A1
0.07%
4.36%
A2
4.44%
4.435%
A3
0.35%
4.79%
Baa1
0.35%
5.14%
Baa2
5.50%
5.500%
Baa3
0.35%
Page 96
5.85%
2016 Capitalization Rate Study
Debt Yield Rates
Industrial
Public
Utility
Average
Aaa
4.04%
N/A
4.04%
Aa
4.23%
4.21%
4.22%
A
4.46%
4.41%
4.44%
Baa
5.42%
5.58%
5.50%
Bond Rating
Source: Moody's Daily Long-Term Corporate Bond Yield Averages as of December 31, 2015.
Page 97
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