Capitalization Rate Study for Centrally Assessed Properties

Transcription

1 for Centrally Assessed Properties as of January 1 st, 2018 Louisiana Tax Commission Public Service Section 1051 North 3 rd Street, 2 nd Floor P. O. Box Baton Rouge, LA (225)

2 Louisiana Tax Commission Table of Contents As of January 1 st, 2018 PAGE DESCRIPTION 1-3 Executive Summary Exhibit A Electric Industry Exhibit B Gas Distribution Exhibit C Pipelines Fluid (Form 6) Exhibit D Pipelines Gas (Form 2) Exhibit E Railroads Class 1 Exhibit F Telecommunications Exhibit G Water Companies Appendix A Moody s Long-Term Corporate Bond Yield Averages Appendix B Bloomberg Bond Yields Appendix C Capital IQ Bond Yields

3 Louisiana Tax Commission Executive Summary As of January 1 st, 2018 The Income Approach to Value is based primarily on the principle of anticipation and involves converting dollars of expected future income, or cash flow, into an estimate of present value. Mathematical techniques used in the approach are tools for converting these data and assumptions into an estimate of current market value. The accuracy of this approach is no greater than the data and assumptions used to estimate the key variables, including the overall capitalization rate. Generally accepted appraisal procedures were used to estimate the key inputs needed to estimate the overall rate. 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 buyer would assume by investing in the property. The band of investment approach was utilized to determine the overall capitalization rates in our studies. This booklet contains a capitalization rate study for each of the seven state assessed industry groups in Louisiana (see Table of Contents). Sources relied upon for this study included the following: The Value Line Investment Survey ( Value Line ), Mergent Bond Record, Moody s, Standard & Poor s, Bloomberg, Yahoo Finance, Security and Exchange Commission documents and certain calculations from other state studies Guideline Companies General guideline companies for each industry were selected based on Value Line Industry segments. Companies reported in each industry were then further screened for selection based on criteria such as primary line of business, published credit ratings, domestic or foreign based, etc. Companies that were recently engaged in acquisition or merger discussions were not considered for this study. 1

4 Capital Structure A representative capital structure is developed for each industry based on the guideline companies selected. Using Value Line as the source, the market value of equity was calculated by multiplying the number of shares outstanding by the listed stock price. The book value of debt was utilized as a proxy for market values unless market values were readily available. Preferred stock amounts were considered, but were excluded in the calculations for all industry types due to level of materiality. The capital structure estimated for use in each industry study is considered to be representative of the typical capital structure of an industry group of companies. Cost of Debt The cost of debt for each industry was calculated by analyzing the debt (credit) rating from Moody s and/or Standard & Poor s for each guideline company, and the corresponding yield information from Moody s and Standard & Poor s (from Bloomberg and from Standard & Poor s Capital IQ). Information concerning recent issuances was also considered, if appropriate. Cost of Equity Our studies utilized two common methods for estimating the cost of equity the Discounted Cash Flow (DCF) Method (also known as the Gordon Growth Model) and the Capital Asset Pricing Model (CAPM). The DCF Method requires an expected dividend yield and an estimated growth rate. To calculate the expected dividend yield, next year s estimated dividend as reported by Value Line for each guideline company was divided by the year-end price for each company. Value Line s estimated growth rate for each guideline company was then added to each company s expected dividend yield to arrive at an estimated cost of equity via the DCF. In the application of the Capital Asset Pricing Model (CAPM), estimates were required for the risk-free rate, beta and the equity risk premium. Two versions of the CAPM were utilized an historical-based model and a forecasted-based model. The risk-free rate and the historical equity risk premium were taken from Duff & Phelps Cost of Capital Navigator. The forecasted equity risk premium was based on estimated returns on the market less the risk-free rate. The beta utilized in each version was an average of the betas reported for each guideline company by Value Line. If warranted, size premiums, as reported in the Cost of Capital Navigator, were added to each version of the CAPM to arrive at estimates for the cost of equity. Floatation Costs As put forth by the California Board of Equalization, 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 are known as floatation costs. Much like loan fees or points on a mortgage, floatation costs effectively reduce the net proceeds that a firm will receive from issuing securities. The cost of capital is adjusted upward to reflect these incurred costs. Since these costs are reflected in the WACC, they should not be allowed as 2

5 expenses in projecting cash flows to be capitalized. The cost of debt and the cost of equity utilized in each industry s study has been adjusted for floatation costs. Utilization of Other Studies and Data During development of this study, valuation staff reviewed data and capitalization rate studies submitted by assessees and other states. The capitalization rates published within this study are intended as guidelines to be applied in the valuation process for each company subject to state assessment in Louisiana. 3

6 ELECTRIC INDUSTRY Weighted Average Cost of Capital (WACC) - Summary Exhibit A SUMMARY Capital Percentage Rate Wt Rate Equity 68.00% 9.10% 6.19% Debt 32.00% 4.10% 1.31% % 7.50% SAY 7.50% Adjusted for Flotation Costs: SUMMARY Capital Percentage Rate Wt Rate Equity 68.00% 9.41% 6.40% Debt 32.00% 4.15% 1.33% % 7.72% SAY 7.70% FC for Equity 3.25% FC for Debt 1.10% ESTIMATED RATE FOR ELECTRIC CO-OP'S *Electrics: Base Rate 7.70% *Adjusted to give consideration to characteristics of a smaller Electric company (based on additional consideration given to size premium) SAY 9.40% *If warranted, staff may adjust stated cap rates due to company specifics Page A-1

7 ELECTRIC INDUSTRY Capital Structure Exhibit A Company Name Outstanding 12/29/2017 Shares Close Price Equity Preferred Long Term Debt Total % Equity % Pref % Debt Allete, Inc. ALE 51,000, ,792,360,000-1,444,600,000 5,236,960, % 0.0% 27.6% Alliant Energy Corporation LNT 231,200, ,851,432,000-4,255,100,000 14,106,532, % 0.0% 30.2% American Electric Power Co., Inc. AEP 491,840, ,184,668,800-18,362,400,000 54,547,068, % 0.0% 33.7% Ameren Corporation AEE 242,600, ,310,974,000-6,922,000,000 21,232,974, % 0.0% 32.6% CMS Energy CMS 281,600, ,319,680,000-9,121,000,000 22,440,680, % 0.0% 40.6% CenterPoint Energy, Inc. CNP 431,030, ,224,010,800-7,531,000,000 19,755,010, % 0.0% 38.1% DTE Energy Company DTE 179,390, ,636,029,400-11,795,000,000 31,431,029, % 0.0% 37.5% Entergy Corporation ETR 179,630, ,620,085,700-14,000,300,000 28,620,385, % 0.0% 48.9% MGE Energy, Inc. MGEE 34,670, ,187,677, ,410,000 2,577,087, % 0.0% 15.1% OGE Energy Corporation OGE 199,710, ,572,456,100-2,749,500,000 9,321,956, % 0.0% 29.5% Vectren Corporation VVC 83,000, ,396,660,000-1,639,100,000 7,035,760, % 0.0% 23.3% WEC Energy Group WEC 315,580, ,963,979,400-8,785,800,000 29,749,779, % 0.0% 29.5% Average 13,255,001, % 0.0% 32.2% Median 12,771,845, % 0.0% 31.4% SAY 68.0% 0.0% 32.0% *Source of Info: ValueLine 12/29/ Page A-2

8 ELECTRIC INDUSTRY Cost of Debt - Summary Exhibit A Company Name S & P Moody's Allete, Inc. ALE BBB+ 10 A3 9 Alliant Energy Corporation LNT A- 9 Baa1 10 American Electric Power Co., Inc. AEP BBB+ 10 Baa1 10 Ameren Corporation AEE A- 9 Baa1 10 CMS Energy CMS A- 9 Baa1 10 CenterPoint Energy, Inc. CNP BBB+ 10 Baa1 10 DTE Energy Company DTE BBB+ 10 Baa1 10 Entergy Corporation ETR BBB+ 10 Baa2 11 MGE Energy, Inc. MGEE AA- 6 A1 7 OGE Energy Corporation OGE A- 9 A3 9 Vectren Corporation VVC A- 9 WEC Energy Group WEC A- 9 A3 9 Average Average Median 9.0 Median 10.0 SAY 9.1 SAY 9.75 A- Baa1 Cost of Debt (Bloomberg) 3.75% Cost of Debt (Capital IQ) 4.40% Cost of Debt (Moody's) 4.14% (S & P avg. = 4.07%) SAY 4.10% Page A-3

9 ELECTRIC INDUSTRY Cost of Equity - Beta Summary Exhibit A Company VL Beta Allete, Inc. ALE 0.80 Alliant Energy Corporation LNT 0.70 American Electric Power Co., Inc. AEP 0.65 Ameren Corporation AEE 0.70 CMS Energy CMS 0.65 CenterPoint Energy, Inc. CNP 0.90 DTE Energy Company DTE 0.65 Entergy Corporation ETR 0.65 MGE Energy, Inc. MGEE 0.75 OGE Energy Corporation OGE 0.95 Vectren Corporation VVC 0.75 WEC Energy Group WEC 0.60 Average 0.73 Median 0.70 SAY 0.72 Betas from ValueLine Page A-4

10 ELECTRIC INDUSTRY Cost of Equity - CAPM (Ex Post/Ex Ante) Exhibit A Capital Asset Pricing Model (CAPM) formula: K e = R f + (K m - R f ) * β + sp with (K m - R f ) = ERP(Ex Ante) INPUTS R f = Risk-free Rate: 2.58% Cost of Capital Navigator ERP = Equity Risk Premium: Ex Post (historical): 7.07% Cost of Capital Navigator K m = Market Return 11.92% State Studies and Others R f = Risk-free Rate 2.58% Cost of Capital Navigator Ex Ante (forward looking): 9.34% β = beta: 0.72 ValueLine sp = size premium: 0.56% Cost of Capital Navigator - based on Market Value of Equity = $12,771,845,400 CAPM Estimates Ex Post Ex Ante R f = 2.58% 2.58% ERP = 7.07% 9.34% β = % 6.72% sp = 0.56% 0.56% Cost of Equity (K e ) = 8.23% 9.86% Page A-5

11 ELECTRIC INDUSTRY Cost of Equity - DCF Exhibit A Company Dividend 1 Price Dividend Yield Growth K e Allete, Inc. ALE % 5.00% 7.99% Alliant Energy Corporation LNT % 6.00% 8.96% American Electric Power Co., Inc. AEP % 4.00% 7.41% Ameren Corporation AEE % 6.00% 9.14% CMS Energy CMS % 6.50% 9.50% CenterPoint Energy, Inc. CNP % 6.00% 9.91% DTE Energy Company DTE % 6.00% 9.28% Entergy Corporation ETR % -2.50% NMF* MGE Energy, Inc. MGEE % 6.50% 8.56% OGE Energy Corporation OGE % 6.00% 10.25% Vectren Corporation VVC % 6.50% 9.30% WEC Energy Group WEC % 6.00% 9.33% Average 9.06% Median 9.28% *no meaningful figure Source: Value Line Data SAY 9.20% Page A-6

12 ELECTRIC INDUSTRY Cost of Equity - Summary Exhibit A Summary of Estimates CAPM Ex Post 8.23% CAPM Ex Ante 9.86% DCF 9.20% Estimated K e = 9.10% Page A-7

13 GAS DISTRIBUTION Weighted Average Cost of Capital (WACC) - Summary Exhibit B SUMMARY Capital Percentage Rate Wt Rate Equity 69.00% 9.60% 6.62% Debt 31.00% 4.10% 1.27% % 7.90% SAY 7.90% Adjusted for Flotation Costs: SUMMARY Capital Percentage Rate Wt Rate Equity 69.00% 9.92% 6.85% Debt 31.00% 4.15% 1.29% % 8.13% SAY 8.10% FC for Equity 3.25% FC for Debt 1.10% ESTIMATED RATE FOR SMALL GAS DISTRIBUTION COMPANIES *Gas Distribution: Base Rate 8.10% *Adjusted to give consideration to characteristics of a smaller Gas Distribution company (based on additional consideration given to size premium) SAY 9.40% *If warranted, staff may adjust stated cap rates due to company specifics Page B-1

14 GAS DISTRIBUTION Capital Structure Exhibit B Company Name Outstanding Shares 12/29/2017 Close Price Equity Preferred Long Term Debt Total % Equity % Pref % Debt Atmos Energy ATO 106,060, ,109,493,400-3,066,730,000 12,176,223, % 0.0% 25.2% New Jersey Resources NJR 86,470, ,476,094, ,700,000 4,373,794, % 0.0% 20.5% NiSource, Inc. NI 336,690, ,642,832,300-7,518,600,000 16,161,432, % 0.0% 46.5% Northwest Natural Gas NWN 28,710, ,712,551, ,430,000 2,469,981, % 0.0% 30.7% South Jersey Industries SJI 79,550, ,484,346,500-1,180,320,000 3,664,666, % 0.0% 32.2% Southwest Gas SWX 47,730, ,841,310,400-1,731,980,000 5,573,290, % 0.0% 31.1% Spire, Inc. SR 48,260, ,626,739,000-1,995,000,000 5,621,739, % 0.0% 35.5% Average 4,699,052, % 0.0% 31.7% Median 3,626,739, % 0.0% 31.1% SAY 69.0% 0.0% 31.0% *Source of Info: ValueLine 12/29/ Page B-2

15 PIPELINES - FLUID Cost of Debt - Summary Exhibit C Company Name S & P Moody's Buckeye Partners, LP BPL BBB- 12 Baa3 12 Enbridge Energy Part. EEP BBB 11 Baa3 12 Energy Transfer Part. ETP BBB- 12 Baa3 12 Holly Energy Partners, LP HEP BB+ 13 Ba3 15 MPLX, LP MPLX BBB 11 Baa3 12 Magellan Midstream MMP BBB+ 10 Baa1 10 NuStar Energy, LP NS BB 14 Ba1 13 Phillips 66 Partners PSXP BBB 11 Baa3 12 Plains All American Pipeline PAA BBB- 12 Ba1 13 Spectra Energy Part. SEP BBB+ 10 Baa2 11 Average 11.6 Average 12.2 Median 11.5 Median 12.0 SAY 11.6 SAY 12.1 BBB- Baa3 Cost of Debt (Bloomberg) 4.45% Cost of Debt (Capital IQ) 5.20% Cost of Debt (Moody's) 4.23% (S & P avg. = 4.07%) SAY 4.60% Page C-3

16 GAS DISTRIBUTION Cost of Equity - Beta Summary Exhibit B Company VL Beta Atmos Energy ATO 0.70 New Jersey Resources NJR 0.80 NiSource, Inc. NI 0.60 Northwest Natural Gas NWN 0.70 South Jersey Industries SJI 0.85 Southwest Gas SWX 0.80 Spire, Inc. SR 0.70 Average 0.74 Median 0.70 SAY 0.72 Betas from ValueLine Page B-4

17 GAS DISTRIBUTION Cost of Equity - CAPM (Ex Post/Ex Ante) Exhibit B Capital Asset Pricing Model (CAPM) formula: K e = R f + (K m - R f ) * β + sp with (K m - R f ) = ERP(Ex Ante) INPUTS R f = Risk-free Rate: 2.58% Cost of Capital Navigator ERP = Equity Risk Premium: Ex Post (historical): 7.07% Cost of Capital Navigator K m = Market Return 11.92% State Studies and Others R f = Risk-free Rate 2.58% Cost of Capital Navigator Ex Ante (forward looking): 9.34% β = beta: 0.72 ValueLine sp = size premium: 1.38% Cost of Capital Navigator - based on Market Value of Equity = $3,626,739,000 CAPM Estimates Ex Post Ex Ante R f = 2.58% 2.58% ERP = 7.07% 9.34% β = % 6.72% sp = 1.38% 1.38% Cost of Equity (K e ) = 9.05% 10.68% Page B-5

18 GAS DISTRIBUTION Cost of Equity - DCF Exhibit B Company Dividend 1 Price Dividend Yield Growth K e Atmos Energy ATO % 6.00% 8.28% New Jersey Resources NJR % 2.00% 4.71% NiSource, Inc. NI % 5.50% 8.23% Northwest Natural Gas NWN % 7.00% 10.17% South Jersey Industries SJI % 5.50% 9.12% Southwest Gas SWX % 8.00% 10.55% Spire, Inc. SR % 7.50% 10.49% Average 8.79% Median 9.12% Source: Value Line Data SAY 8.96% Page B-6

19 GAS DISTRIBUTION Cost of Equity - Summary Exhibit B Summary of Estimates CAPM Ex Post 9.05% CAPM Ex Ante 10.68% DCF 8.96% Estimated K e = 9.60% Page B-7

20 PIPELINES - FLUID Weighted Average Cost of Capital (WACC) - Summary Exhibit C SUMMARY Capital Percentage Rate Wt Rate Equity 61.00% 14.80% 9.03% Debt 39.00% 4.60% 1.79% % 10.82% SAY 10.80% Adjusted for Flotation Costs: SUMMARY Capital Percentage Rate Wt Rate Equity 61.00% 15.30% 9.33% Debt 39.00% 4.65% 1.81% % 11.15% SAY 11.20% FC for Equity 3.25% FC for Debt 1.10% *If warranted, staff may adjust stated cap rates due to company specifics Page C-1

21 PIPELINES - FLUID Capital Structure Exhibit C Company Name Outstanding Shares 12/29/2017 Close Price Equity Preferred Long Term Debt Total % Equity % Pref % Debt Buckeye Partners, LP BPL 146,640, ,266,012,000-4,593,630,000 11,859,642, % 0.0% 38.7% Enbridge Energy Part. EEP 326,520, ,509,241,200-6,835,100,000 11,344,341, % 0.0% 60.3% Energy Transfer Part. ETP 1,155,500, ,706,560,000-33,630,000,000 54,336,560, % 0.0% 61.9% Holly Energy Partners, LP HEP 64,320, ,089,756,800-1,245,070,000 3,334,826, % 0.0% 37.3% MPLX, LP MPLX 415,000, ,720,050,000-6,848,000,000 21,568,050, % 0.0% 31.8% Magellan Midstream MMP 228,020, ,175,738,800-4,051,410,000 20,227,148, % 0.0% 20.0% NuStar Energy, LP NS 93,030, ,786,248,500-3,232,600,000 6,018,848, % 0.0% 53.7% Phillips 66 Partners PSXP 110,510, ,785,198,500-2,273,000,000 8,058,198, % 0.0% 28.2% Plains All American Pipeline PAA 725,190, ,967,921,600-10,489,000,000 25,456,921, % 0.0% 41.2% Spectra Energy Part. SEP 317,300, ,546,042,000-5,714,000,000 18,260,042, % 0.0% 31.3% Average 10,155,276, % 0.0% 40.4% Median 9,906,027, % 0.0% 38.0% SAY 61.0% 0.0% 39.0% *Source of Info: ValueLine 12/29/ Page C-2

22 PIPELINES - FLUID Cost of Debt - Summary Exhibit C Company Name S & P Moody's Buckeye Partners, LP BPL BBB- 12 Baa3 12 Enbridge Energy Part. EEP BBB 11 Baa3 12 Energy Transfer Part. ETP BBB- 12 Baa3 12 Holly Energy Partners, LP HEP BB+ 13 Ba3 15 MPLX, LP MPLX BBB 11 Baa3 12 Magellan Midstream MMP BBB+ 10 Baa1 10 NuStar Energy, LP NS BB 14 Ba1 13 Phillips 66 Partners PSXP BBB 11 Baa3 12 Plains All American Pipeline PAA BBB- 12 Ba1 13 Spectra Energy Part. SEP BBB+ 10 Baa2 11 Average 11.6 Average 12.2 Median 11.5 Median 12.0 SAY 11.6 SAY 12.1 BBB- Baa3 Cost of Debt (Bloomberg) 4.45% Cost of Debt (Capital IQ) 5.20% Cost of Debt (Moody's) 4.23% (S & P avg. = 4.07% ) SAY 4.60% Page C-3

23 PIPELINES - FLUID Capitalization rate Study Cost of Equity - Beta Summary Exhibit C Company VL Beta Buckeye Partners, LP BPL 1.20 Enbridge Energy Part. EEP 1.30 Energy Transfer Part. ETP 1.55 Holly Energy Partners, LP HEP 1.00 MPLX, LP MPLX 1.40 Magellan Midstream MMP 1.20 NuStar Energy, LP NS 1.30 Phillips 66 Partners PSXP 1.15 Plains All American Pipeline PAA 1.50 Spectra Energy Part. SEP 0.90 Average 1.25 Median 1.25 SAY 1.25 Betas from ValueLine Page C-4

24 PIPELINES - FLUID Cost of Equity - CAPM (Ex Post/Ex Ante) Exhibit C Capital Asset Pricing Model (CAPM) formula: K e = R f + (K m - R f ) * β + sp with (K m - R f ) = ERP(Ex Ante) INPUTS R f = Risk-free Rate: 2.58% Cost of Capital Navigator ERP = Equity Risk Premium: Ex Post (historical): 7.07% Cost of Capital Navigator K m = Market Return 11.92% State Studies and Others R f = Risk-free Rate 2.58% Cost of Capital Navigator Ex Ante (forward looking): 9.34% β = beta: 1.25 ValueLine sp = size premium: 0.87% Cost of Capital Navigator - based on Market Value of Equity = $9,906,027,000 CAPM Estimates Ex Post Ex Ante R f = 2.58% 2.58% ERP = 7.07% 9.34% β = % 11.67% sp = 0.87% 0.87% Cost of Equity (K e ) = 12.29% 15.12% Page C-5

25 PIPELINES - FLUID Cost of Equity - DCF Exhibit C Company Dividend 1 Price Dividend Yield Growth K e Buckeye Partners, LP BPL % 6.50% 16.69% Enbridge Energy Part. EEP % 26.50% 36.64% Energy Transfer Part. ETP % 8.50% 21.11% Holly Energy Partners, LP HEP % 2.00% 2.00% MPLX, LP MPLX % 12.00% 18.63% Magellan Midstream MMP % 6.50% 11.86% NuStar Energy, LP NS % 0.00% 0.00% Phillips 66 Partners PSXP % 22.50% 27.43% Plains All American Pipeline PAA % 13.00% 18.81% Spectra Energy Part. SEP % 5.50% 12.86% Average 16.60% Median 17.66% Source: Value Line Data SAY 17.10% Page C-6

26 PIPELINES - FLUID Cost of Equity - Summary Exhibit C Summary of Estimates CAPM Ex Post 12.29% CAPM Ex Ante 15.12% DCF 17.10% Estimated K e = 14.80% Page C-7

27 PIPELINES - GAS Weighted Average Cost of Capital (WACC) - Summary Exhibit D SUMMARY Capital Percentage Rate Wt Rate Equity 60.00% 15.80% 9.48% Debt 40.00% 4.70% 1.88% % 11.36% SAY 11.40% Adjusted for Flotation Costs: SUMMARY Capital Percentage Rate Wt Rate Equity 60.00% 16.33% 9.80% Debt 40.00% 4.75% 1.90% % 11.70% SAY 11.70% FC for Equity 3.25% FC for Debt 1.10% *If warranted, staff may adjust stated cap rates due to company specifics Page D-1

28 PIPELINES - GAS Capital Structure Exhibit D Company Name Outstanding Shares 12/29/2017 Close Price Equity Preferred Long Term Debt Total % Equity % Pref % Debt Boardwalk Pipeline BWP 250,300, ,231,372,962-3,585,700,000 6,817,072, % 0.0% 52.6% Energy Transfer Part. ETP 1,155,500, ,706,560,088-33,630,000,000 54,336,560, % 0.0% 61.9% Enterprise Products EPD 2,152,700, ,068,077,493-21,710,900,000 78,778,977, % 0.0% 27.6% Kinder Morgan, Inc. KMI 2,231,150, ,316,879,819-35,116,000,000 75,432,879, % 0.0% 46.6% ONEOK, Inc. OKE 381,290, ,379,950,791-8,092,000,000 28,471,950, % 0.0% 28.4% TC Pipelines, LP TCP 69,600, ,695,759,894-2,427,000,000 6,122,759, % 0.0% 39.6% Williams Partners, LP WPZ 973,820, ,764,738,411-16,000,000,000 53,764,738, % 0.0% 29.8% Average 26,166,191, % 0.0% 40.9% Median 20,706,560, % 0.0% 39.6% SAY 60.0% 0.0% 40.0% *Source of Info: ValueLine 12/29/ Page D-2

29 PIPELINES - GAS Cost of Debt - Summary Exhibit D Company Name S & P Moody's Boardwalk Pipeline BWP BBB- 12 Baa3 12 Energy Transfer Part. ETP BBB- 12 Baa3 12 Enterprise Products EPD BBB+ 10 Baa3 12 Kinder Morgan, Inc. KMI BBB- 12 Baa3 12 ONEOK, Inc. OKE BBB 11 Baa3 12 TC Pipelines, LP TCP BBB- 12 Baa2 11 Williams Partners, LP WPZ BBB 11 Baa3 12 Average Average Median 12.0 Median 12.0 SAY 11.7 SAY 11.9 BBB- Baa3 Cost of Debt (Bloomberg) 4.45% Cost of Debt (Capital IQ) 5.20% Cost of Debt (Moody's) 4.23% (S & P avg. = 4.07%) SAY 4.70% Page D-3

30 PIPELINES - GAS Cost of Equity - Beta Summary Exhibit D Company VL Beta Boardwalk Pipeline BWP 1.00 Energy Transfer Part. ETP 1.55 Enterprise Products EPD 1.30 Kinder Morgan, Inc. KMI 1.45 ONEOK, Inc. OKE 1.55 TC Pipelines, LP TCP 1.15 Williams Partners, LP WPZ 1.55 Average 1.36 Median 1.45 SAY 1.41 Betas from ValueLine Page D-4

31 PIPELINES - GAS Cost of Equity - CAPM (Ex Post/Ex Ante) Exhibit D Capital Asset Pricing Model (CAPM) formula: K e = R f + (K m - R f ) * β + sp with (K m - R f ) = ERP(Ex Ante) INPUTS R f = Risk-free Rate: 2.58% Cost of Capital Navigator ERP = Equity Risk Premium: Ex Post (historical): 7.07% Cost of Capital Navigator K m = Market Return 11.92% State Studies and Others R f = Risk-free Rate 2.58% Cost of Capital Navigator Ex Ante (forward looking): 9.34% β = beta: 1.41 ValueLine sp = size premium: 0.56% Cost of Capital Navigator - based on Market Value of Equity = $20,706,560,088 CAPM Estimates Ex Post Ex Ante R f = 2.58% 2.58% ERP = 7.07% 9.34% β = % 13.16% sp = 0.56% 0.56% Cost of Equity (K e ) = 13.11% 16.30% Page D-5

32 PIPELINES - GAS Cost of Equity - DCF Exhibit D Company Dividend 1 Price Dividend Yield Growth K e Boardwalk Pipeline BWP % 12.50% 15.60% Energy Transfer Part. ETP % 8.50% 21.11% Enterprise Products EPD % 12.50% 19.03% Kinder Morgan, Inc. KMI % 24.00% 26.77% ONEOK, Inc. OKE % 18.50% 24.08% TC Pipelines, LP TCP % 6.00% 6.00% Williams Partners, LP WPZ % 0.00% 6.19% Average 16.97% Median 19.03% Source: Value Line Data SAY 18.00% Page D-6

33 PIPELINES - GAS Cost of Equity - Summary Exhibit D Summary of Estimates CAPM Ex Post 13.11% CAPM Ex Ante 16.30% DCF 18.00% Estimated K e = 15.80% Page D-7

34 RAILROADS Weighted Average Cost of Capital (WACC) - Summary Exhibit E SUMMARY Capital Percentage Rate Wt Rate Equity 82.00% 11.40% 9.35% Debt 18.00% 4.10% 0.74% % 10.09% SAY 10.10% Adjusted for Flotation Costs: SUMMARY Capital Percentage Rate Wt Rate Equity 82.00% 11.78% 9.66% Debt 18.00% 4.15% 0.75% % 10.41% SAY 10.40% FC for Equity 3.25% FC for Debt 1.10% ESTIMATED RATE FOR SHORT-LINE RAILROADS *Class 1 Base Rate 10.40% *Adjusted to give consideration to characteristics of a smaller, short-line Railroad (based on additional consideration given to size premiums) SAY 12.50% *If warranted, staff may adjust stated cap rates due to company specifics Page E-1

35 RAILROADS Capital Structure Exhibit E Company Name 12/29/2017 Close Outstanding Shares Price Equity Preferred Long Term Debt Total % Equity % Pref % Debt CSX Corporation CSX 893,720, ,163,537,200-11,788,000,000 60,951,537, % 0.0% 19.3% Norfolk Southern NSC 286,150, ,463,135,000-9,280,000,000 50,743,135, % 0.0% 18.3% Union Pacific UNP 789,840, ,917,544,000-15,930,000, ,847,544, % 0.0% 13.1% Average 65,514,738, % 0.0% 16.9% Median 49,163,537, % 0.0% 18.3% SAY 82.0% 0.0% 18.0% *Source of Info: ValueLine 12/29/ Page E-2

36 RAILROADS Cost of Debt - Summary Exhibit E Company Name S & P Moody's CSX Corporation CSX BBB+ 10 Baa1 10 Norfolk Southern NSC BBB+ 10 Baa1 10 Union Pacific UNP A 8 A3 9 Average Average Median 10.0 Median 10.0 SAY 9.7 SAY 9.8 BBB+ Baa1 Cost of Debt (Bloomberg) 3.91% Cost of Debt (Capital IQ) 4.08% Cost of Debt (Moody's) 4.31% (S & P avg. = 4.07%) SAY 4.10% Page E-3

37 RAILROADS Cost of Equity - Beta Summary Exhibit E Company VL Beta CSX Corporation CSX 1.20 Norfolk Southern NSC 1.15 Union Pacific UNP 1.05 Average 1.13 Median 1.15 SAY 1.14 Betas from ValueLine Page E-4

38 RAILROADS Cost of Equity - CAPM (Ex Post/Ex Ante) Exhibit E Capital Asset Pricing Model (CAPM) formula: K e = R f + (K m - R f ) * β + sp with (K m - R f ) = ERP(Ex Ante) INPUTS R f = Risk-free Rate: 2.58% Cost of Capital Navigator ERP = Equity Risk Premium: Ex Post (historical): 7.07% Cost of Capital Navigator K m = Market Return 11.92% State Studies and Others R f = Risk-free Rate 2.58% Cost of Capital Navigator Ex Ante (forward looking): 9.34% β = beta: 1.14 ValueLine sp = size premium: 0.00% Cost of Capital Navigator - based on Market Value of Equity = $49,163,537,200 CAPM Estimates Ex Post Ex Ante R f = 2.58% 2.58% ERP = 7.07% 9.34% β = % 10.64% sp = 0.00% 0.00% Cost of Equity (K e ) = 10.64% 13.22% Page E-5

39 RAILROADS Cost of Equity - DCF Exhibit E Company Dividend 1 Price Dividend Yield Growth K e CSX Corporation CSX % 11.50% 12.95% Norfolk Southern NSC % 8.00% 9.68% Union Pacific UNP % 8.00% 9.68% Average 10.87% Median 9.98% SAY 10.40% Source: Value Line Data Page E-6

40 RAILROADS Cost of Equity - Summary Exhibit E Summary of Estimates CAPM Ex Post 10.64% CAPM Ex Ante 13.22% DCF 10.40% Estimated K e = 11.40% Page E-7

41 TELECOMMUNICATIONS Weighted Average Cost of Capital (WACC) - Summary Exhibit F SUMMARY Capital Percentage Rate Wt Rate Equity 32.00% 14.30% 4.58% Debt 68.00% 4.30% 2.92% % 7.50% SAY 7.50% Adjusted for Flotation Costs: SUMMARY Capital Percentage Rate Wt Rate Equity 32.00% 14.78% 4.73% Debt 68.00% 4.35% 2.96% % 7.69% SAY 7.70% FC for Equity 3.25% FC for Debt 1.10% ESTIMATED RATE FOR LOCAL EXCHANGE TELECOMS *Telecoms: Interexchange Base Rate *Adjusted to give consideration to characteristics of a smaller, local exchange Telecom (based on additional consideration given to size premium) 7.70% SAY 13.80% *If warranted, staff may adjust stated cap rates due to company specifics Page F-1

42 TELECOMMUNICATIONS Capital Structure Exhibit F Company Name Outstanding Shares 12/29/2017 Close Price Equity Preferred Long Term Debt Total % Equity % Pref % Debt AT&T, Inc. T 6,139,330, ,697,150, ,728,000, ,425,150, % 0.0% 39.3% CenturyLink, Inc. CTL 549,650, ,168,162,000-24,854,000,000 34,022,162, % 0.0% 73.1% Consolidated Communications CNSL 70,840, ,539,600-2,311,250,000 3,174,789, % 0.0% 72.8% Frontier Communications FTR 78,460, ,389,600-17,604,000,000 18,134,389, % 0.0% 97.1% Verizon Communications VZ 4,079,440, ,924,759, ,317,000, ,241,759, % 0.0% 34.8% Windstream Holdings WIN 182,900, ,365,000-10,550,000,000 10,888,365, % 0.0% 96.9% Average 77,587,060, % 0.0% 63.4% Median 5,015,850, % 0.0% 72.8% SAY 32.0% 0.0% 68.0% *Source of Info: ValueLine 12/29/ Page F-2

43 TELECOMMUNICATIONS Cost of Debt - Summary Exhibit F Company Name S & P Moody's AT&T, Inc. T BBB+ 10 Baa1 10 CenturyLink, Inc. CTL BBB+ 10 Ba3 15 Consolidated Communications CNSL B+ 16 Frontier Communications FTR B3 18 Verizon Communications VZ BBB+ 10 Baa1 10 Windstream Holdings WIN B2 17 Average Average Median Median SAY SAY BBB Ba3 Cost of Debt (Bloomberg) 4.06% Cost of Debt (Capital IQ) 4.51% Cost of Debt (Moody's) 4.23% (S & P avg. = 4.07%) SAY 4.30% Page F-3

44 TELECOMMUNICATIONS Cost of Equity - Beta Summary Exhibit F Company VL Beta AT&T, Inc. T 0.75 CenturyLink, Inc. CTL 1.00 Consolidated Communications CNSL 1.00 Frontier Communications FTR 1.15 Verizon Communications VZ 0.75 Windstream Holdings WIN 1.25 Average 0.98 Median 1.00 SAY 0.99 Betas from ValueLine Page F-4

45 TELECOMMUNICATIONS Cost of Equity - CAPM (Ex Post/Ex Ante) Exhibit F Capital Asset Pricing Model (CAPM) formula: K e = R f + (K m - R f ) * β + sp with (K m - R f ) = ERP(Ex Ante) INPUTS R f = Risk-free Rate: 2.58% Cost of Capital Navigator ERP = Equity Risk Premium: Ex Post (historical): 7.07% Cost of Capital Navigator K m = Market Return 11.92% State Studies and Others R f = Risk-free Rate 2.58% Cost of Capital Navigator Ex Ante (forward looking): 9.34% β = beta: 0.99 ValueLine sp = size premium: 0.90% Cost of Capital Navigator - based on Market Value of Equity = $5,015,850,800 CAPM Estimates Ex Post Ex Ante R f = 2.58% 2.58% ERP = 7.07% 9.34% β = % 9.24% sp = 0.90% 0.90% Cost of Equity (K e ) = 10.48% 12.72% Page F-5

46 TELECOMMUNICATIONS Cost of Equity - DCF Exhibit F Company Dividend 1 Price Dividend Yield Growth K e AT&T, Inc. T % 5.50% 10.64% CenturyLink, Inc. CTL % -1.50% NMF* Consolidated Communications CNSL % 34.00% 46.72% Frontier Communications FTR % 43.00% 78.50% Verizon Communications VZ % 2.00% 6.46% Windstream Holdings WIN % 0.00% 0.00% Average 28.46% Median 10.64% *no meaningful figure SAY 19.60% Source: Value Line Data Page F-6

47 TELECOMMUNICATIONS Cost of Equity - Summary Exhibit F Summary of Estimates CAPM Ex Post 10.48% CAPM Ex Ante 12.72% DCF 19.60% Estimated K e = 14.30% Page F-7

48 WATER COMPANIES Weighted Average Cost of Capital (WACC) - Summary Exhibit G SUMMARY Capital Percentage Rate Wt Rate Equity 83.00% 10.40% 8.63% Debt 17.00% 4.00% 0.68% % 9.31% SAY 9.30% Adjusted for Flotation Costs: SUMMARY Capital Percentage Rate Wt Rate Equity 83.00% 10.75% 8.92% Debt 17.00% 4.04% 0.69% % 9.61% SAY 9.60% FC for Equity 3.25% FC for Debt 1.10% ESTIMATED RATE FOR SMALL WATER COMPANIES *Water Companies: Base Rate *Adjusted to give consideration to characteristics of a smaller water company (based on additional consideration given to size premium) 9.60% SAY 11.10% *If warranted, staff may adjust stated cap rates due to company specifics Page G-1

49 WATER COMPANIES Capital Structure Exhibit G Company Name Outstanding Shares 12/29/2017 Close Price Equity Preferred Long Term Debt Total % Equity % Pref % Debt American States Water AWR 36,680, ,124,138, ,950,000 2,445,088, % 0.0% 13.1% California Water CWT 48,010, ,177,253, ,700,000 2,696,953, % 0.0% 19.3% Middlesex Water WTR 16,340, ,129, ,810, ,939, % 0.0% 17.2% The York Water Company YORW 12,860, ,954,020-88,930, ,884, % 0.0% 16.9% Average 1,347,368, % 0.0% 16.6% Median 1,388,134, % 0.0% 17.1% SAY 83.0% 0.0% 17.0% *Source of Info: ValueLine 12/29/ Page G-2

50 WATER COMPANIES Cost of Debt - Summary Exhibit G Company Name S & P Moody's American States Water AWR A+ 7 A3 9 California Water CWT A+ 7 A1 7 Middlesex Water WTR A 8 The York Water Company YORW A- 9 Average 7.75 Average 8.00 Median 7.50 Median 8.00 SAY 7.63 SAY 8.00 A A2 Cost of Debt (Bloomberg) 3.75% Cost of Debt (Capital IQ) 4.37% Cost of Debt (Moody's) 3.79% (S & P avg. = 4.07%) SAY 4.00% Page G-3

51 WATER COMPANIES Cost of Equity - Beta Summary Exhibit G Company VL Beta American States Water T 0.80 California Water CTL 0.80 Middlesex Water VZ 0.80 The York Water Company WIN 0.80 Average 0.80 Median 0.80 SAY 0.80 Betas from ValueLine Page G-4

52 WATER COMPANIES Cost of Equity - CAPM (Ex Post/Ex Ante) Exhibit G Capital Asset Pricing Model (CAPM) formula: K e = R f + (K m - R f ) * β + sp with (K m - R f ) = ERP(Ex Ante) INPUTS R f = Risk-free Rate: 2.58% Cost of Capital Navigator ERP = Equity Risk Premium: Ex Post (historical): 7.07% Cost of Capital Navigator K m = Market Return 11.92% State Studies and Others R f = Risk-free Rate 2.58% Cost of Capital Navigator Ex Ante (forward looking): 9.34% β = beta: 0.80 ValueLine sp = size premium: 1.58% Cost of Capital Navigator - based on Market Value of Equity = $1,388,134,097 CAPM Estimates Ex Post Ex Ante R f = 2.58% 2.58% ERP = 7.07% 9.34% β = % 7.47% sp = 1.58% 1.58% Cost of Equity (K e ) = 9.82% 11.63% Page G-5

53 WATER COMPANIES Cost of Equity - DCF Exhibit G Company Dividend 1 Price Dividend Yield Growth K e American States Water T % 6.50% 8.28% California Water CTL % 9.00% 10.59% Middlesex Water VZ % 8.50% 10.76% The York Water Company WIN % 7.00% 8.98% Average 9.65% Median 9.78% Source: Value Line Data SAY 9.70% Page G-6

54 WATER COMPANIES Cost of Equity - Summary Exhibit G Summary of Estimates CAPM Ex Post 9.82% CAPM Ex Ante 11.63% DCF 9.70% Estimated K e = 10.40% Page G-7

55 Cost of Debt - Mergent Bond Yields Appendix A MOODY'S LONG-TERM CORPORATE BOND YIELD AVERAGES As of December 2017 Public Utility Bonds Jan Feb March April May June July Aug Sept Oct Nov Dec Aa A Baa As of December 2017 Industrial Bonds Jan Feb March April May June July Aug Sept Oct Nov Dec Aaa Aa A Baa As of December 2017 Corporate by Ratings Jan Feb March April May June July Aug Sept Oct Nov Dec Aaa Aa A Baa Average Average Average

56 Cost of Debt - Bloomberg (S & P) Bond Yields Appendix B BLOOMBERG (S & P) BOND YIELDS Corporates As of 12/31/17 AAA AA A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- 20 Year Maturity NA NA NA NA NA NA Year Maturity NA NA NA NA NA NA Year Maturity NA NA NA NA NA NA Average NA NA NA NA NA NA Industrials As of 12/31/17 AAA AA A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- 20 Year Maturity NA NA NA NA NA Year Maturity NA NA NA NA NA Year Maturity NA NA NA NA NA Average NA NA NA NA NA Utilities As of 12/31/17 AAA AA A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- 20 Year Maturity NA NA NA NA NA NA NA 25 Year Maturity NA NA NA NA NA NA NA 30 Year Maturity NA NA NA NA NA NA NA Average NA NA NA NA NA NA NA

57 Cost of Debt - Capital IQ Bond Yields Appendix C CAPITAL IQ - S & P Data All Corporates As of 12/31/17 AAA AA A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC 20-yr Mat 4.02% 4.19% NA 4.31% NA NA 4.60% NA NA 6.42% NA NA 9.61% NA NA 14.01% 25-yr Mat 4.11% 4.28% NA 4.40% NA NA 4.68% NA NA 6.54% NA NA 9.82% NA NA 13.91% 30-yr Mat 4.12% 4.29% NA 4.41% NA NA 4.69% NA NA 6.56% NA NA 9.86% NA NA 13.88% Average 4.08% 4.25% NA 4.37% NA NA 4.66% NA NA 6.50% NA NA 9.76% NA NA 13.93% Energy As of 12/31/17 AAA AA A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC 20-yr Mat 3.92% 4.03% NA 4.19% NA NA 4.80% NA NA 7.39% NA NA 9.63% NA NA 14.82% 25-yr Mat 4.01% 4.12% NA 4.28% NA NA 4.89% NA NA 7.55% NA NA 9.85% NA NA 14.67% 30-yr Mat 4.02% 4.12% NA 4.29% NA NA 4.90% NA NA 7.57% NA NA 9.88% NA NA 14.62% Average 3.98% 4.09% NA 4.25% NA NA 4.86% NA NA 7.50% NA NA 9.79% NA NA 14.70% Utilities As of 12/31/17 AAA AA A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC 20-yr Mat 3.91% 4.29% NA 4.31% NA NA 4.39% NA NA 7.20% NA NA 9.44% NA NA 13.97% 25-yr Mat 4.00% 4.38% NA 4.39% NA NA 4.48% NA NA 7.35% NA NA 9.67% NA NA 13.87% 30-yr Mat 4.01% 4.38% NA 4.40% NA NA 4.49% NA NA 7.37% NA NA 9.71% NA NA 13.84% Average 3.97% 4.35% NA 4.37% NA NA 4.45% NA NA 7.31% NA NA 9.60% NA NA 13.89% Industrials As of 12/31/17 AAA AA A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC 20-yr Mat 3.77% 3.87% NA 3.89% NA NA 4.29% NA NA 6.23% NA NA 9.66% NA NA 13.91% 25-yr Mat 3.85% 3.96% NA 3.97% NA NA 4.37% NA NA 6.35% NA NA 9.88% NA NA 13.82% 30-yr Mat 3.86% 3.96% NA 3.98% NA NA 4.38% NA NA 6.36% NA NA 9.91% NA NA 13.79% Average 3.83% 3.93% NA 3.95% NA NA 4.35% NA NA 6.31% NA NA 9.82% NA NA 13.84% Telecommunications As of 12/31/17 AAA AA A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC 20-yr Mat 4.03% 4.20% NA 4.40% NA NA 4.45% NA NA 8.10% NA NA 11.70% NA NA 14.01% 25-yr Mat 4.12% 4.29% NA 4.49% NA NA 4.54% NA NA 8.28% NA NA 11.77% NA NA 13.91% 30-yr Mat 4.12% 4.29% NA 4.50% NA NA 4.55% NA NA 8.31% NA NA 11.77% NA NA 13.88% Average 4.09% 4.26% NA 4.46% NA NA 4.51% NA NA 8.23% NA NA 11.74% NA NA 13.93%