Direct Testimony and Schedules James M. Coyne Before the ... · 3 Q. PLEASE STATE YOUR NAME AND...

Direct Testimony and Schedules James M. Coyne

Before the Minnesota Public Utilities Commission State of Minnesota

In the Matter of the Application of Northern States Power Company for Authority to Increase Rates for Electric Service in Minnesota

Docket No. E002/GR-15-826 Exhibit___(JMC-1)

Return on Equity

November 2, 2015

i Docket No. E002/GR-15-826 Coyne Direct

Table of Contents

I. Introduction and Qualifications 1

II. Purpose and Overview of Direct Testimony 3

III. Regulatory Principles 5

IV. Context for Setting NSPM’s Return on Equity 9

V. Effect of Economic and Capital Market Conditions 10

A. Expectations for Higher Interest Rates 12

B. Increasing Credit Spreads 14

VI. Proxy Group Selection 18

VII. Determination of the Appropriate Cost of Equity 21

A. Constant Growth DCF Model 22

B. Impact of Flotation Costs 26

C. Multi-Stage DCF Model 27

D. CAPM Analysis 32

E. Risk Premium Analysis 35

VIII. Business Risks 39

A. Capital Expenditure Risk 40

B. Multi-Year Rate Plan 43

IX. Capital Structure 47

X. Summary and Conclusions 48

Docket No. E002/GR-15-826 Coyne Direct

Schedules

Statement of Qualifications Schedule 1

Proxy Group Screening Data and Results Schedule 2

Constant Growth DCF Schedule 3

Flotation Cost Adjustment Schedule 4

Calculation of Long-Term GDP Growth Rate Schedule 5

Multi-Stage DCF Analysis

Mean Growth Rate – Forecasted GDP Growth Schedule 6.1

Low Growth Rate – Forecasted GDP Growth Schedule 6.2

High Growth Rate – Forecasted GDP Growth Schedule 6.3

Mean Growth Rate – Historical GDP Growth Schedule 6.4

Low Growth Rate – Historical GDP Growth Schedule 6.5

High Growth Rate – Historical GDP Growth Schedule 6.6

BETA Coefficient Calculations Schedule 7.1

Market Risk Premium Schedule 7.2

Capital Asset Pricing Model Schedule 7.3

Treasury Bond Yield Plus Risk Premium Schedule 8.1

Utility Bond Yield Plus Risk Premium Schedule 8.2

2015-2019 Capital Expenditures as a Percent of 2014 Net Plant: NSPM and Proxy Group Companies

Schedule 9.1

ii

Docket No. E002/GR-15-826 Coyne Direct

Schedules (continued)

Comparison of Capital Expenditures: NSPM to Proxy Group Companies

Schedule 9.2

ROE Adjustment Mechanism for 5-year MYRP Schedule 10

Capital Structure Analysis Schedule 11

Prefiled Discovery Appendix A

iii

1 Docket No. E002/GR-15-826 Coyne Direct

I. INTRODUCTION AND QUALIFICATIONS 1

2

Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. 3

A. My name is James M. Coyne, and I am employed by Concentric Energy 4

Advisors, Inc. (“Concentric”) as a Senior Vice President. Concentric is a 5

management consulting and economic advisory firm, focused on the North 6

American energy and water industries. Based in Marlborough, 7

Massachusetts and Washington D.C., Concentric specializes in regulatory 8

and litigation support, financial advisory services, energy market strategies, 9

market assessments, energy commodity contracting and procurement, 10

economic feasibility studies, and capital market analyses. My business 11

address is 293 Boston Post Road West, Suite 500, Marlborough, MA 01752. 12

13

Q. PLEASE DESCRIBE THE EDUCATION AND PROFESSIONAL EXPERIENCE YOU14

HAVE HAD THAT TOGETHER QUALIFY YOU TO PROVIDE THIS TESTIMONY. 15

A. I am among Concentric’s professionals who provide expert testimony before 16

federal, state and Canadian provincial agencies on matters pertaining to 17

economics, finance, and public policy in the energy industry. I regularly 18

advise utilities, generating companies, public bodies and private equity 19

investors on business issues pertaining to the utility industry. This work 20

includes calculating the cost of capital for the purpose of ratemaking and 21

providing expert testimony and studies on matters pertaining to rate policy, 22

valuation, capital costs, incentive regulation, earnings sharing mechanisms, 23

demand side management, low-income programs, fuels and power markets. 24

In addition, I work with utilities, independent developers and public bodies 25

on issues pertaining to the management and development of power 26

generation, distribution and transmission facilities. I have authored 27


numerous articles on the energy industry, lectured on utility regulation for 1

regulatory commission staff, and provided testimony before the FERC as 2

well as state and provincial jurisdictions in the U.S. and Canada. 3

4

Before joining Concentric, I was Senior Managing Director in the Corporate 5

Economics Practice for FTI/Lexecon, and Managing Director of Arthur 6

Andersen’s Energy and Utilities Corporate Finance Practice. In those 7

positions, I provided expert testimony and advisory services on mergers, 8

acquisitions, divestitures and capital markets for clients in the energy 9

industry. In addition to the foregoing prior positions, I was also Managing 10

Director for Navigant Consulting, with responsibility for the firm’s Financial 11

Services practice, and Senior Economist for the Massachusetts Energy 12

Facilities Siting Council, where I analyzed the supply plans and facilities 13

proposals from the state’s electric and gas utilities. I also served as State 14

Energy Economist for the Maine Office of Energy Resources. 15

16

I hold a B.S. in Business Administration from Georgetown University and a 17

M.S. in Resource Economics from the University of New Hampshire. My 18

educational and professional background is summarized more fully on 19

Exhibit___(JMC-1), Schedule 1. 20

21

Q. ON WHOSE BEHALF ARE YOU SUBMITTING THIS TESTIMONY? 22

A. I am submitting this testimony on behalf of Northern States Power 23

Company, a Minnesota corporation (“NSPM” or the “Company”), a wholly 24

owned subsidiary of Xcel Energy Inc. (“Xcel Energy”). 25


II. PURPOSE AND OVERVIEW OF DIRECT TESTIMONY 1

2

Q. WHAT IS THE PURPOSE OF YOUR DIRECT TESTIMONY? 3

A. The purpose of my Direct Testimony is to present evidence and provide a 4

recommendation regarding an appropriate return on equity (“ROE”)1 for the 5

Company’s regulated electric utility operations. My analyses and conclusions 6

are supported by the data presented in Exhibit___(JMC-1), Schedules 2 7

through 11, which have been prepared by me or under my direction. 8

9

Q. PLEASE PROVIDE A BRIEF OVERVIEW OF THE ANALYSES THAT YOU10

CONDUCTED TO SUPPORT YOUR ROE RECOMMENDATION. 11

A. My ROE recommendation is based primarily on the range of results that I 12

derive from the Discounted Cash Flow (“DCF”) model, the Capital Asset 13

Pricing Model (“CAPM”), and the Bond Yield Plus Risk Premium approach 14

(“Risk Premium”). My application of the DCF model is based on reputable 15

third-party growth rate projections, as well as market-based information on 16

current annualized dividends and recent stock prices. 17

18

My recommendation also considers the general economic and capital market 19

environment. I specifically consider investors’ expectation for higher 20

interest rates which, when combined with widening credit spreads 21

throughout 2015, suggest that investors are becoming more risk averse and 22

that the cost of capital is increasing for all companies, including regulated 23

utilities. 24

1 I use the terms “ROE” and “cost of equity” interchangeably throughout my Direct Testimony.


In addition to the analyses discussed above, I also consider the Company’s 1

capital expenditure program in relation to a set of proxy companies 2

(described later in my testimony) to assist with determining the appropriate 3

ROE. Furthermore, I adjust the results of my DCF analyses for flotation 4

costs related to equity issuances by Xcel Energy. 5

6

Q. WHAT IS YOUR CONCLUSION REGARDING THE APPROPRIATE COST OF EQUITY7

FOR THE COMPANY? 8

A. The ROE results presented in my Direct Testimony indicate a broad range 9

of 8.95 percent to 11.39 percent from a combination of models and 10

alternative input assumptions. Based on this analysis, and in light of the 11

business risks of NSPM compared to the proxy group companies, combined 12

with my observations pertaining to capital market conditions, I recommend 13

the Minnesota Public Utilities Commission (the “Commission”) authorize an 14

ROE of 10.0 percent for NSPM. 15

16

Q. HOW IS THE REMAINDER OF YOUR DIRECT TESTIMONY ORGANIZED? 17

A. The balance of my Direct Testimony is organized as follows: Section III 18

provides background on the regulatory principles behind making an ROE 19

determination in general. Section IV provides a context and foundation for 20

my ROE determination, including an overview of NSPM and a history of 21

the Company’s ROE awards. Section V presents a review of current and 22

projected economic and capital market conditions and their impacts on 23

utility cost of capital. Section VI describes the criteria and approach for the 24

selection of a proxy group of comparable companies. Section VII provides a 25

description of the data and methodologies used to estimate the cost of 26

equity, as well as the results of the Constant Growth DCF, Multi-Stage DCF, 27


CAPM, and Risk Premium analyses. Section VIII provides an assessment of 1

the business risk factors I have considered in arriving at an appropriate ROE 2

for NSPM. Section IX reviews NSPM’s proposed capital structure in the 3

context of the proxy group. Section X summarizes my results, conclusions 4

and recommendation. 5

6

III. REGULATORY PRINCIPLES7

8

Q. PLEASE DESCRIBE THE GUIDING PRINCIPLES USED IN ESTABLISHING THE9

COST OF CAPITAL FOR A REGULATED UTILITY. 10

A. The foundations of public utility regulation require that utilities receive a fair 11

rate of return sufficient to attract needed capital at reasonable rates. The 12

basic tenets of this regulatory doctrine originate from several bellwether 13

decisions by the United States Supreme Court. In Bluefield Waterworks and 14

Improvement Company v. Public Service Commission of West Virginia, 262 U.S. 679 15

(1923) (“Bluefield”), the Court stated: 16

A public utility is entitled to such rates as will permit it to earn a 17 return on the value of the property which it employs for the 18 convenience of the public equal to that generally being made at 19 the same time and in the same general part of the country on 20 investments in other business undertakings which are attended 21 by corresponding risks and uncertainties… 22

23 The return should be reasonably sufficient to assure investor 24 confidence in the financial soundness of the utility and should 25 be adequate, under efficient and economical management, to 26 maintain and support its credit and enable it to raise the money 27 necessary for the proper discharge of its public duties. 28

29

Later, in Federal Power Commission v. Hope Natural Gas Company, 320 U.S. 591 30

(1944) (“Hope”), the Court established a standard for the ROE that remains 31


the guiding principle for rate making regulatory proceedings to this day: 1

[T]he return to the equity owner should be commensurate with 2 returns on investments in other enterprises having 3 corresponding risks. That return, moreover, should be 4 sufficient to assure confidence in the financial integrity of the 5 enterprise, so as to maintain its credit and to attract capital. 6

7

Q. HAS THE COMMISSION RELIED ON THESE SAME BASIC PRINCIPLES? 8

A. Yes. In its Order in NSPM’s previous rate case, the Commission cited 9

Minnesota Statute Section 216B.16, subd. 6, which provides: 10

11

In determining just and reasonable rates, the Commission is required to: 12

Give due consideration to the public need for adequate, 13 efficient, and reasonable service and to the need of the public 14 utility for revenue sufficient to enable it to meet the cost of 15 furnishing service, including adequate provision for 16 depreciation of its utility property used and useful in rendering 17 service to the public, and to earn a fair and reasonable return upon the 18 investment in such property.2 19

20

Q. PLEASE BRIEFLY DISCUSS HOW THOSE PRINCIPLES APPLY IN THE CONTEXT OF21

THE REGULATED RATE OF RETURN. 22

A. Regulated utilities rely primarily on common stock and long-term debt to 23

finance their permanent property, plant and equipment. The allowed rate of 24

return for a regulated utility is based on its weighted average cost of capital, 25

where the costs of the individual sources of capital, debt and equity, are 26

weighted by their respective book values. The ROE represents the cost of 27

raising and retaining equity capital, and it is estimated by using one or more 28

2 Minnesota Public Utilities Commission, Docket No. E002/GR-13-868, issued May 8, 2015, at 53.


analytical techniques that use market data to quantify investor expectations 1

regarding equity returns. 2

3

However, the ROE cannot be derived through quantitative metrics and 4

models alone. To properly estimate the ROE the financial, regulatory and 5

economic context in which the analysis takes place must also be considered. 6

The DCF, CAPM and Risk Premium approaches, while fundamental to the 7

ROE determination, are still only models, and one should not assume that 8

the results of these models can be mechanistically applied without also 9

considering judgment, the context of capital market conditions, and the 10

relative risk of NSPM to the proxy group companies. 11

12

Also, it is important to note that in Hope, the Supreme Court found that 13

under the statutory standard of “just and reasonable” it is the result reached, 14

not the method employed, which is controlling.3 Consequently, it is 15

appropriate to consider a variety of approaches and data sources when 16

arriving at a recommended ROE. 17

18

Based on these widely recognized standards, the Commission’s Order in this 19

case should provide NSPM with the opportunity to earn a return on equity 20

that is: 21

Commensurate with returns on investments in enterprises having22

comparable risks;23

Adequate to attract capital on reasonable terms, thereby enabling24

NSPM to provide safe, reliable service; and25

3 Federal Power Commission v. Hope Natural Gas Company, 320 U.S. 591 (1944), at 602.


Sufficient to ensure the financial soundness of NSPM’s operations. 1

2

Importantly, a fair return must satisfy all three of these standards. The 3

allowed ROE should enable NSPM to finance capital expenditures on 4

reasonable terms and provide financial flexibility over the period during 5

which rates are expected to remain in effect. 6

7

Q. WHAT ARE YOUR CONCLUSIONS REGARDING REGULATORY GUIDELINES AND8

CAPITAL MARKET EXPECTATIONS? 9

A. The ratemaking process is premised on the principle that, in order for 10

investors and companies to commit the capital needed to provide safe and 11

reliable service, the utility must have the opportunity to recover the return of 12

invested capital, and the market-required return on that capital. Because 13

utility operations are capital intensive, regulatory decisions should enable the 14

utility to attract capital on favorable terms. Such decisions balance the long-15

term interests of customers and shareholders. Moreover, the financial 16

community carefully monitors the current and expected financial condition 17

of utility companies, as well as the regulatory environment in which they 18

operate. In that respect, the regulatory environment is one of the most 19

important factors considered in both debt and equity investors’ assessments 20

of risk. It is therefore important for the ROE authorized in this proceeding 21

to take into consideration the current and expected capital market conditions 22

with which NSPM must contend, as well as investors’ expectations and 23

requirements regarding both risks and returns. 24


IV. CONTEXT FOR SETTING NSPM’S RETURN ON EQUITY 1

2

Q. PLEASE PROVIDE A BRIEF OVERVIEW OF NSPM’S OPERATIONS. 3

A. NSPM is an operating utility primarily engaged in the generation, 4

transmission, distribution and sale of electricity in Minnesota, North Dakota 5

and South Dakota. NSPM also purchases, transports, distributes and sells 6

natural gas to customers in Minnesota and North Dakota. The Company 7

provides electric utility service to approximately 1.4 million customers and 8

natural gas distribution service to approximately 500,000 customers.4 9

Approximately 88 percent of NSPM’s retail electric operating revenues were 10

derived from operations in Minnesota during 2014.5 NSPM typically 11

accounts for 35-45 percent of Xcel Energy’s earnings.6 NSPM directly owns 12

approximately 6,965 MW of generation capacity.7 Northern States Power 13

Company, a Wisconsin corporation, and wholly-owned subsidiary of Xcel 14

Energy Inc., owns approximately 631 MW of generation capacity.8 NSPM 15

and NPSW together manage that total generation capacity pursuant to an 16

Interchange Agreement between the two companies. NSPM’s senior 17

unsecured credit ratings are A- from Standard & Poor’s (“S&P”), A2 from 18

Moody’s Investors Service (“Moody’s”), and A- from Fitch Ratings 19

(“Fitch”). 20

21

Q. PLEASE CHARACTERIZE NSPM’S HISTORY OF AUTHORIZED ROES RELATIVE22

TO THAT OF OTHER ELECTRIC UTILITIES IN THE U.S. 23

4 SEC Form 10-K, Xcel Energy Inc., filed February 20, 2015, at 12. 5 Ibid. 6 Xcel Energy Investor Presentation, September 9, 2015, at 5. 7 SEC Form 10-K, Xcel Energy Inc., filed February 20, 2015, at 47. 8 Ibid.


A. The Commission has been generally supportive of NSPM’s capital needs and 1

has historically authorized an ROE for NSPM comparable to the national 2

average for other integrated electric utilities during the same period. Figure 3

1 shows the history of NSPM’s allowed ROEs since 1993 relative to those of 4

other electric utilities during the same quarter. 5

6

Figure 1 7 Authorized ROE, NSPM vs. National Average in the Same Quarter9 8

9

10

11

12

13

14

15

16

17

18

19

20

V. EFFECT OF ECONOMIC AND CAPITAL MARKET CONDITIONS 21

22

Q. WHY IS IT IMPORTANT TO CONSIDER THE EFFECT OF PREVAILING ECONOMIC23

CONDITIONS WHEN SETTING THE APPROPRIATE ROE? 24

A. The required cost of capital, including the ROE, is a function of prevailing 25

and expected conditions in the general economy and in financial markets. 26

9 Source: SNL Financial.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

1993.3 2006.3 2009.4 2012.1 2013.3 2015.1

Au

thori

zed

RO

E (

%)

Quarter Authorized

NSPM National Average


This is consistent with the Hope and Bluefield decisions, which provide that 1

the authorized ROE for a public utility should allow the utility to attract 2

investor capital at a reasonable cost under a variety of economic and 3

financial market conditions. The standard ROE estimation tools such as the 4

DCF, CAPM, and Risk Premium models, each reflect the state of the general 5

economy and financial markets by incorporating specific economic and 6

financial data. However, it is important to recognize that these inputs are 7

only samples of the various economic and market forces that may affect a 8

utility’s ROE going forward. Therefore, a more complete analysis of these 9

forces and their relevant impacts is integral to any ROE recommendation. 10

11

Q. WHAT ARE YOUR PRIMARY OBSERVATIONS WITH RESPECT TO THE CURRENT12

STATE OF THE U.S. ECONOMY? 13

A. The U.S. economy has emerged from the protracted slowdown that followed 14

the 2008 financial crisis and the ensuing severe economic recession. U.S. 15

real GDP decreased at an annual rate of 0.2 percent in the first quarter of 16

2015 due to unique circumstances surrounding winter weather and the 17

slowdown in drilling activity.10 Economic growth accelerated to an annual 18

rate of 3.9 percent in the second quarter.11 The U.S. unemployment rate for 19

September 2015 stands at 5.1 percent, down sharply from its peak of 10.0 20

percent set in October 2009.12 Going forward, as the economy continues to 21

expand, the Federal Reserve is expected to start increasing short-term 22

interest rates in order to sustain the desired balance between unemployment 23

and consumer price inflation. 24

10 Bureau of Economic Analysis, press release issued June 24, 2015. 11 Bureau of Economic Analysis, press release issued September 25, 2015. 12 Source: Bureau of Labor Statistics.


Q. WHAT ANALYSIS HAVE YOU CONDUCTED TO ASSESS CURRENT CAPITAL1

MARKET CONDITIONS AND THEIR EFFECT ON YOUR ROE ANALYSIS? 2

A. I considered the following issues in the current capital markets as being 3

particularly relevant to my ROE analysis and recommendation: (A) 4

expectations for higher interest rates; and (B) widening credit spreads 5

between utility bonds and Treasury bonds. I discuss these issues in sequence 6

below. 7

8

A. Expectations for Higher Interest Rates 9

Q. ARE LOW INTEREST RATES THE “NEW NORMAL”? 10

A. No. As much as the economy and borrowers (including utility customers) 11

have benefited from a period of historic lows in interest rates, a combination 12

of economic growth (and corresponding demand for capital) and gradual 13

easing of accommodative monetary policy are expected to place upward 14

pressure on interest rates as the economic cycle progresses over the next 15

several years. As of September 30, 2015, the 30-day average yield on the 30-16

year U.S. Treasury bond was 2.92 percent. In contrast, the consensus among 17

financial forecasters is for the average yield on the 30-year U.S. Treasury 18

bond to be 4.80 percent in the period from 2017 through 202113, 19

representing an increase of 188 basis points over the next several years. 20

21

Q. WHAT IS THE FINANCIAL MARKET’S EXPECTATION REGARDING THE22

FEDERAL RESERVE’S PLANS TO START RAISING SHORT-TERM INTEREST23

RATES? 24

13 Blue Chip Financial Forecasts, Vol. 34, No. 6, June 1, 2015, at 14.


A. The October 2015 issue of Blue Chip Financial Forecasts surveyed market 1

participants concerning their views regarding the timing of possible future 2

rate increases by the Federal Reserve. Blue Chip reports that approximately 3

87 percent of the 48 market participants surveyed expect that the Federal 4

Reserve will raise the target for short-term interest rates before the end of 5

2015.146

7

Q. HOW HAVE YOU REFLECTED INVESTOR EXPECTATIONS FOR HIGHER8

INTEREST RATES HAVE IN YOUR RECOMMENDED COST OF EQUITY? 9

A. I have attempted to capture the effect of forward-looking market indicators 10

in several of my ROE estimation models. For example, I have used the 11

forecasted 30-year Treasury bond yield in my CAPM and Risk Premium 12

analyses in order to take into consideration the market’s expectation for 13

higher interest rates. However, the current dividend yield component of the 14

Constant Growth DCF analysis does not fully reflect these forward market 15

expectations for higher interest rates, and, as such, the DCF results are static 16

in this sense. 17

18

Q. WHAT ARE YOUR CONCLUSIONS REGARDING THE EFFECT OF HIGHER19

INTEREST RATES ON THE COST OF EQUITY FOR REGULATED UTILITIES SUCH 20

AS NSPM? 21

A. The market’s expectation of higher interest rates indicates that the cost of 22

equity for the proxy companies using traditional cost of equity estimation 23

techniques that rely on historic or current market data is likely to lag 24

investors’ required return during the period that NSPM’s rates are likely to 25

14 Blue Chip Financial Forecasts, Vol. 34, No. 10, October 1, 2015, at 14.


be in effect. Consequently, a consensus expectation of rising interest rates, 1

along with the widening credit spreads that have occurred between 2

government bonds and utility bonds throughout 2015, supports selection of 3

an ROE for NSPM that reflects those market conditions. 4

5

B. Increasing Credit Spreads 6

Q. HAVE YOU CONDUCTED ANY ANALYSIS OF INVESTOR RISK SENTIMENT? 7

A. Yes. Credit spreads are a widely-recognized measure of investor risk 8

sentiment. Wider credit spreads indicate that investors are requiring a higher 9

premium (i.e., a higher interest rate) to compensate them for the higher risk 10

associated with longer-term or lower-rated debt instruments. Wider credit 11

spreads between 30-year Treasury bonds and Baa-rated utility bonds indicate 12

that investors are requiring a larger premium to compensate for the risk of 13

owning corporate debt, while wider credit spreads between A-rated and Baa-14

rated utility debt indicate that investors require a larger premium to 15

compensate for the risk of owning lower-rated debt. I compared the average 16

credit spreads for the Moody’s A-rated utility bond and the Baa-rated utility 17

bond against the 30-year U.S. Treasury bond. As shown in Figure 2, the 18

average credit spreads at the end of September 2015 are as high as they have 19

been at any point since the credit crisis of 2008-2009, which suggests 20

increased risk aversion, even in low-risk utility bonds. 21


Figure 2 1 Credit Spreads – Government and Utility Bond Yields 2

3

4

5

6

7

8

9

10

11

12

13

14

In particular, the spread between the Moody’s Baa-rated utility bond index 15

and the Moody’s A-rated utility bond index has increased to 79 basis points, 16

the spread between the Moody’s Baa-rated utility bond index and the 30-year 17

Treasury yield has increased to 203 basis points, and the spread between the 18

Moody’s A-rated utility bond and the 30-year U.S. Treasury bond has 19

increased to 124 basis points. While not approaching the levels experienced 20

during the Great Recession, widening credit spreads are indicative of less risk 21

tolerance among utility bond investors, despite lower yields on U.S. Treasury 22

bonds. 23

24

Q. WHAT DO WIDER CREDIT SPREADS INDICATE ABOUT THE MARKET? 25

A. Wider credit spreads are an indication that bond investors are becoming 26

more concerned about future economic conditions and the ability of 27

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Moody's A − 30-year U.S. Treasury (90-day rolling average)

Moody's Baa − 30-year U.S. Treasury (90-day rolling average)

AVERAGE JAN-2006 TO NOV-2007MOODY'S A SPREAD = 1.17%MOODY'S BAA SPREAD = 1.43%

90-DAY AVERAGE ENDING SEPTEMBER 30, 2015MOODY'S A SPREAD = 1.24%MOODY'S BAA SPREAD = 2.03%


corporations to withstand any economic downturn that may occur. 1

Recently, The Wall Street Journal reported on the trend toward higher credit 2

spreads: 3

The U.S. corporate-bond market is starting to flash caution 4 signals about the broader economy. The difference in 5 yield, called the “spread,” between bonds from America’s 6 strongest companies and ultrasafe U.S. Treasury securities 7 has been steadily increasing, a trend that in the past has 8 foreshadowed economic problems. Wider spreads mean 9 that investors want more yield relative to Treasurys to own 10 bonds from U.S. companies. It can signal that investors are 11 less confident about companies’ business prospects and 12 financial health, though other factors likely also are at play. 13 Spreads in investment-grade corporate bonds – debt from 14 companies rated triple-B minus or higher – are on track to 15 increase for the second year in a row, according to Barclays 16 data. That would be the first time since the financial crisis 17 in 2007 and 2008 that spreads widened in two consecutive 18 years. 19

*** 20

Investors and analysts say they are closely watching the 21 action to determine whether trouble is brewing once again. 22 Concerns are growing about companies’ ability to pay back 23 the massive debt load taken on in recent years, as ultralow 24 interest rates spurred corporate finance chiefs to sell record 25 amounts of bonds.15 26

27 Q. HOW HAVE EQUITY MARKETS REACTED TO WIDENING CREDIT SPREADS AND28

THE PROSPECT FOR HIGHER INTEREST RATES? 29

A. Equity markets have been volatile in recent weeks and widening credit 30

spreads signal possible economic disruption ahead. As shown in Figure 3, 31

utility stocks underperformed the broader market from February through 32

September 2015, as investors reacted to the gradual rise in Treasury bond 33

15 Mike Cherney, “U.S. Bonds Flash a Warning Sign,” The Wall Street Journal, September 28, 2015, at C1.


yields. The broader market, as measured by the S&P 500, has been declining 1

steadily and sometimes sharply since mid-August, and market volatility has 2

been increasing. 3

4

Figure 3 5 Stock Performance Relative to U.S. Treasury Yields - 2015 6

7

8

9

10

11

12

13

14

15

16

17

18

19

Q. WHAT CONCLUSIONS DO YOU DRAW FROM YOUR ANALYSIS OF CAPITAL20

MARKET CONDITIONS? 21

A. My primary conclusion is that it is important to consider the effect of capital 22

market conditions on the inputs and assumptions used in the ROE 23

estimation models and to consider whether current market conditions are 24

sustainable over the period that the recommended ROE would be in effect. 25

Since interest rates are projected to increase substantially from current levels 26

and credit spreads have been widening throughout 2015, it is important to 27

2.00%

2.20%

2.40%

2.60%

2.80%

3.00%

3.20%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

01/0

2/1

5

01/1

1/1

5

01/2

0/1

5

01/2

9/1

5

02/0

7/1

5

02/1

6/1

5

02/2

5/1

5

03/0

6/1

5

03/1

5/1

5

03/2

4/1

5

04/0

2/1

5

04/1

1/1

5

04/2

0/1

5

04/2

9/1

5

05/0

8/1

5

05/1

7/1

5

05/2

6/1

5

06/0

4/1

5

06/1

3/1

5

06/2

2/1

5

07/0

1/1

5

07/1

0/1

5

07/1

9/1

5

07/2

8/1

5

08/0

6/1

5

08/1

5/1

5

08/2

4/1

5

09/0

2/1

5

09/1

1/1

5

09/2

0/1

5

09/2

9/1

5

U.S

. T

reasu

ry B

on

d Y

ield

Sto

ck P

rice %

Ch

an

ge

S&P 500 Utilities S&P 500 30-year U.S. Treasury Bond


consider the results of multiple ROE estimation methodologies and to 1

reflect projected capital market conditions in the CAPM and Risk Premium 2

models by using a risk-free rate that is consistent with forward-looking 3

expectations for Treasury yields. Sole reliance on the DCF model results 4

would tend to understate the cost of equity at this time, because the current 5

dividend yield component of the DCF analysis does not fully reflect these 6

forward market expectations for higher interest rates. 7

8

VI. PROXY GROUP SELECTION9

10

Q. WHY IS IT NECESSARY TO SELECT A PROXY GROUP TO ESTIMATE THE FAIR11

RETURN ON EQUITY FOR NSPM? 12

A. Since the ROE is a market-based concept and given the fact that NSPM is 13

not publicly-traded, it is necessary to establish a group of companies that are 14

both publicly-traded and comparable to certain NSPM business and financial 15

characteristics to serve as a “proxy” for purposes of the ROE estimation 16

process. 17

18

Even if NSPM’s regulated electric utility operations in Minnesota made up 19

the entirety of a publicly-traded entity, it is possible that transitory events 20

could bias the Company’s market value in one way or another over a given 21

period of time. A significant benefit of using a proxy group is the ability to 22

mitigate the effects of anomalous events that may be associated with any one 23

company. The proxy companies used in my ROE analyses possess a set of 24

business and operating characteristics that make them similar to NSPM’s 25

regulated electric utility operations, and thus provide a reasonable basis for 26

the derivation and assessment of ROE estimates. 27


Q. PLEASE DESCRIBE THE SPECIFIC SCREENING CRITERIA YOU HAVE UTILIZED. 1

A. I began with the 46 companies that Value Line classifies as “Electric 2

Utilities” and then screened companies according to the following criteria: 3

1. Consistently pays quarterly cash dividends;4

2. Maintains an investment grade long-term issuer rating (BBB- or5

higher from S&P or Baa3 or higher from Moody’s) from both S&P6

and Moody’s;7

3. Is covered by more than one equity analyst;8

4. Has positive earnings growth rates published by at least two of the9

following sources: Value Line Investment Survey (“Value Line”),10

Thomson First Call, and Zacks Investment Research (“Zacks”);11

5. Owns generation assets that are included in rate base;12

6. Owned generation comprises greater than 50 percent of the13

Company’s MWh sales to ultimate customers;14

7. Regulated revenue and regulated net operating income make up more15

than 60 percent of the consolidated company’s revenue and net16

operating income, respectively;17

8. Regulated electric revenue and regulated electric net operating income18

make up more than 80 percent of the consolidated company’s19

regulated operations; and20

9. Is not involved in a merger or other transformative transaction for an21

approximate six-month period prior to my analysis.22

23

Q. DID YOU INCLUDE XCEL ENERGY IN YOUR PROXY GROUP? 24

A. No, I did not. It is generally my practice to exclude the subject company, or 25

its parent holding company, from the proxy group due to the circular logic 26

that would occur by including those results. 27


Q. WHAT IS THE COMPOSITION OF YOUR RESULTING PROXY GROUP? 1

A. Based on the screening criteria discussed above, I arrived at a proxy group 2

consisting of the companies shown in Table 1. 3

4

Table 1 5 Proxy Group 6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

Please refer to Exhibit___(JMC-1), Schedule 2 for my proxy group screening 22

data and results. 23

24

Q. DO YOUR SCREENING CRITERIA RESULT IN A GROUP OF COMPANIES THAT25

INVESTORS WOULD VIEW AS COMPARABLE? 26

Company Ticker

ALLETE, Inc. ALE

Alliant Energy Corporation LNT

Ameren Corporation AEE

American Electric Power Company, Inc. AEP

Duke Energy Corporation DUK

El Paso Electric Company EE

Empire District Electric Company EDE

Great Plains Energy Inc. GXP

IDACORP, Inc. IDA

OGE Energy Corporation OGE

Pinnacle West Capital Corp. PNW

PNM Resources, Inc. PNM

Westar Energy, Inc. WR


A. Yes, I believe so. I have selected the above group to best align with the 1

financial and operational characteristics of NSPM. The screening criterion 2

requiring an investment grade credit rating ensures that the proxy group 3

companies, like NSPM, are generally in sound financial condition. Because 4

credit ratings take into account business and financial risks, the ratings 5

provide a broad measure of investment risk that is widely referenced by 6

investors. Ratings of “investment grade” generally indicate sound financial 7

condition. Additionally, I have screened on the percent of revenues and net 8

operating income from regulated operations to differentiate utilities that are 9

protected by regulation from those with substantial merchant or market-10

related risks. Also, I have screened on the percent contribution of the 11

electric segment to overall financial results in order to differentiate utilities 12

that, like NSPM, derive the predominant share of their revenues and 13

operating income from their electric segments. Further, the generation 14

screens identify utilities that, like NSPM, own regulated generation in rate 15

base and bear the risk of generation in their asset mix. Those screens 16

collectively reflect the risk factors that investors consider in making their 17

investment decisions in utility companies. 18

19

VII. DETERMINATION OF THE APPROPRIATE COST OF EQUITY20

21

Q. WHAT MODELS DID YOU USE IN YOUR ROE ANALYSES? 22

A. I have considered the results of a variety of ROE estimation models, 23

including the Constant Growth DCF, Multi-Stage DCF, CAPM, and Risk 24

Premium models. 25


A. Constant Growth DCF Model 1

Q. PLEASE DESCRIBE THE DCF APPROACH. 2

A. The DCF approach, which is widely used in regulatory proceedings, is based 3

on the theory that a stock’s price represents the present value of all future 4

expected cash flows. In its simplest form, the DCF model expresses the 5

ROE as the sum of the expected dividend yield and long-term growth rate: 6

7

8

9

where “k” equals the required return, “D” is the current dividend, “g” is the 10

expected growth rate, and “P” represents the subject company’s stock price. 11

12

Assuming a constant growth rate in dividends, the model may be rearranged 13

to compute the ROE accordingly, as shown in Equation [2]: 14

15

16

17

Stated in this manner, the cost of common equity is equal to the dividend 18

yield plus the dividend growth rate. 19

20

Q. WHAT ARE THE ASSUMPTIONS UNDERLYING THE CONSTANT GROWTH DCF21

MODEL? 22

A. The Constant Growth DCF model is based on the following assumptions: 23

(1) a constant average growth rate for earnings and dividends; (2) a stable 24

dividend payout ratio; (3) a constant price-to-earnings multiple; and (4) a 25

discount rate greater than the expected growth rate. 26

[1] gP

gDk

)1(

r = + g [2] P

D


Q. PLEASE SUMMARIZE YOUR APPLICATION OF THE CONSTANT GROWTH DCF1

MODEL. 2

A. I calculated DCF results for each of the proxy group companies using the 3

following inputs: 4

1. Average stock prices for the historical period, over 30, 90 and 1805

trading days through September 30, 2015;6

2. Annualized dividend per share as of September 30, 2015; and7

3. Company-specific earnings growth forecasts as of September 30, 20158

for the term g.9

10

My application of the Constant Growth DCF model is provided in 11

Exhibit___(JMC-1), Schedule 3. 12

13

Q. WHY DID YOU USE AVERAGING PERIODS OF 30, 90 AND 180 DAYS? 14

A. It is important to use an average of recent trading days to calculate the term 15

P in the DCF model to ensure that the ROE is not skewed by anomalous 16

events that may affect stock prices on any given trading day. At the same 17

time, it is important to reflect the conditions that have defined the financial 18

markets over the recent past. In my view, consideration of those three 19

averaging periods reasonably balances those concerns. 20

21

Q. DID YOU ADJUST THE DIVIDEND YIELD TO ACCOUNT FOR PERIODIC GROWTH22

IN DIVIDENDS? 23

A. Yes. Utility companies tend to increase their quarterly dividends at different 24

times throughout the year, so it is reasonable to assume that such increases 25

will be evenly distributed over calendar quarters. Given that assumption, it 26

is reasonable to apply one-half of the expected annual dividend growth for 27


the purposes of calculating this component of the DCF model. That 1

adjustment ensures that the projected dividend yield is representative of the 2

coming 12-month period. Accordingly, the DCF estimates reflect one-half 3

of the expected growth in the dividend yield.16 4

5

Q. WHAT SOURCES OF GROWTH HAVE YOU USED IN YOUR DCF ANALYSIS? 6

A. I have used the consensus analyst five-year growth estimates in earnings per 7

share (“EPS”) from Thomson First Call and Zacks, as well as EPS growth 8

rates published by Value Line. 9

10

Q. WHY DID YOU FOCUS ON EARNINGS PER SHARE GROWTH? 11

A. The Constant Growth DCF model assumes that dividends grow at a single 12

growth rate in perpetuity. Accordingly, in order to reduce the long-term 13

growth rate to a single measure, one must assume a constant payout ratio, 14

and that EPS, dividends per share and book value per share will all grow at 15

the same constant rate. Over the long term, however, dividend growth can 16

only be sustained by earnings growth. It is therefore important to focus on 17

measures of long-term earnings growth from credible sources as an 18

appropriate measure of long-term growth in the DCF model. 19

20

Q. ARE OTHER SOURCES OF ESTIMATED DIVIDEND GROWTH AVAILABLE TO21

INVESTORS? 22

A. Yes, although that does not mean that investors incorporate such estimates 23

into their investment evaluations. Academic studies suggest that investors 24

base their investment decisions on analysts’ expectations of growth in 25

16 The expected dividend yield is calculated as d1 = d0 (1 + ½ g).


earnings.17 I am not aware of any similar findings regarding non-earnings 1

based growth estimates. In addition, the only forward-looking growth rates 2

that are available on a consensus basis are analysts’ EPS growth rates. The 3

fact that earnings growth projections are the only widely-reported estimates 4

of growth provides further support that earnings growth is considered the 5

most meaningful measure of growth among the investment community. 6

7

Q. HOW DID YOU CALCULATE THE MEAN HIGH, MEAN LOW AND OVERALL8

MEAN DCF RESULTS? 9

A. I calculated the Mean High DCF result using the maximum growth rate (i.e., 10

the maximum of the Value Line, Zacks and First Call EPS growth rates) in 11

combination with the expected dividend yield for each of the proxy group 12

companies. I used a similar approach to calculate the Mean Low DCF 13

results, using the minimum growth rate for each company. The Overall 14

Mean results reflect the average growth rate for each company in 15

combination with the expected dividend yield. 16

17

Q. WHAT ARE THE MEAN RESULTS OF YOUR CONSTANT GROWTH DCF18

ANALYSIS? 19

A. The mean results of my Constant Growth DCF analysis are provided in 20

Schedule 3 and summarized in Table 2. 21

17 See, e.g., Harris and Marston, Estimating Shareholder Risk Premia Using Analysts Growth Forecasts, Financial Management, 21 (Summer 1992), and Vander Weide and Carleton, Investor Growth Expectations: Analysts

vs. History, The Journal of Portfolio Management, Spring 1988, at 81. Please note that while the original study was published in 1988, it was updated in 2004 under the direction of Dr. Vander Weide. The results of that updated study are consistent with Vander Weide and Carleton’s original conclusions.


Table 2 1 Mean Constant Growth DCF Results, Including Flotation Costs 2

3

4

5

6

7

B. Impact of Flotation Costs 8

Q. WHAT ARE FLOTATION COSTS, AND HOW DO THEY AFFECT THE COST OF9

CAPITAL? 10

A. Flotation costs are the costs associated with the sale of new issues of 11

common stock. Those costs include out-of-pocket expenditures for 12

preparation, filing, underwriting, and other costs of issuance of common 13

stock. To the extent that a company is denied the opportunity to recover 14

prudently incurred flotation costs, actual returns will fall short of expected 15

(or required) returns, thereby diminishing the utility’s allowed return. To 16

appropriately reflect flotation costs, the DCF calculation should be modified 17

to provide a dividend yield that would reimburse investors for issuance 18

costs. The actual equity issuances for Xcel Energy are shown on Company 19

witness Mr. Brian J. Van Abel’s Exhibit___(BJV-1), Schedule 13. Based on 20

those issuance costs, as shown on Exhibit___(JMC-1), Schedule 4, I 21

conclude that an adjustment of 0.19 percent (i.e., 19 basis points) would be 22

an appropriate reflection of flotation costs for the Company. 23

24

Q. DO YOUR FINAL DCF RESULTS INCLUDE AN ADJUSTMENT FOR FLOTATION25

COST RECOVERY? 26

30-Day Average Stock Price



Overall Mean Result 9.38% 9.35% 9.19%


A. Yes. Consistent with the long-standing precedent of the Commission, I 1

have adjusted the results of my DCF analyses to include flotation costs.18 2

3

C. Multi-Stage DCF Model 4

Q. HAVE YOU CONSIDERED ANY ALTERNATIVE FORMS OF THE DCF MODEL? 5

A. Yes, I also considered the results of a multi-period (three-stage) DCF Model 6

(the “Multi-Stage DCF” model). 7

8

Q. PLEASE DESCRIBE YOUR MULTI-STAGE DCF ANALYSIS.9

A. My Multi-Stage DCF analysis approaches the ROE from the perspective of 10

an investment in the stock of each of the proxy group companies. The 11

model calculates the internal rate of return of the cash flow stream generated 12

by a cash outflow equal to the average current stock price of the proxy group 13

companies followed by annual cash inflows of the average dividend of the 14

proxy group companies, as those dividends grow according to the assumed 15

growth rate for each stage. 16

17

Q. PLEASE EXPLAIN THE DIVIDEND GROWTH RATES IN YOUR MULTI-STAGE18

DCF ANALYSIS. 19

A. I applied the Multi-Stage DCF model to the same proxy group. The near-20

term growth rate refers to the Value Line, Thomson First Call and Zacks 21

forecasts for Years 1-5, using the mean of these rates as the Overall Mean 22

scenario and the high and low of these rates as Mean High and Mean Low 23

scenarios, respectively. I then transition to a long-term forecast of gross 24

domestic product (“GDP”) growth for Years 11-200. Years 6-10 are linear 25

18 Minnesota Public Utilities Commission, Docket No. E002/GR-13-868, issued May 8, 2015, at 56.


interpolations of the near-term and long-term growth rates. The Multi-Stage 1

DCF model is useful for testing the assumption that dividends will grow at a 2

constant growth rate over time. 3

4

Q. HOW DID YOU CALCULATE THE LONG-TERM GDP GROWTH RATE? 5

A. The long-term GDP growth rate is based on a real (constant dollar) GDP 6

growth rate, combined with estimates for inflation. I have used two sources 7

of real GDP growth rate: (1) the consensus Blue Chip Financial Forecast of 8

2.30 percent; and (2) the historical GDP growth rate for the period from 9

1929-2014 of 3.25 percent, based on data from the Bureau of Economic 10

Analysis. I have applied the inflation estimate to the estimate of real GDP 11

growth to develop the nominal (i.e., post-inflation) GDP growth rate. I have 12

used two alternative estimates for inflation: (1) the Blue Chip Financial 13

forecast for 2021-2025; and (2) the 30-day average spread between the 30-14

year Treasury bond and the 30-year Treasury Inflation-Protected Securities 15

(“TIPS”) bond, which is an inflation-indexed bond that presents the broader 16

market’s view of forward-looking inflation. The results, as shown in 17

Exhibit___(JMC-1), Schedule 5, are nominal GDP growth estimates of 4.36 18

percent (using projected real GDP growth) and 5.32 percent (using historical 19

real GDP growth). 20

21

Q. WHAT ARE THE RESULTS OF YOUR MULTI-STAGE DCF ANALYSIS? 22

A. The results of my Multi-Stage DCF analysis are provided in 23

Exhibit___(JMC-1), Schedules 6.1 through 6.6, and the Overall Mean results 24

are summarized in Table 3. 25


Table 3 1 Multi-Stage DCF Results, Including Flotation Costs 2

3

4

5

6

7

8

Q. WHAT IS YOUR CONCLUSION REGARDING THE RESULTS OF THE MULTI-9

STAGE DCF MODEL? 10

A. While the Multi-Stage DCF model allows for the selection of different 11

growth rates in the three stages of the model, like the Constant Growth 12

DCF model, the Multi-Stage DCF model relies on the historic dividend yield 13

as a starting point and fails to adequately account for the projected increase 14

in interest rates. For that reason, I believe it is important to also consider 15

the results of other ROE estimation techniques, such as the CAPM and Risk 16

Premium models. 17

18

Q. HAVE OTHER REGULATORY AGENCIES RECENTLY RECOGNIZED THAT THE19

DCF MODELS ARE CURRENTLY UNDERSTATING THE COST OF EQUITY? 20

A. Yes. While I recognize that the Commission has traditionally relied primarily 21

on the DCF model to establish the authorized ROE for regulated electric 22

and gas utilities in Minnesota, other regulatory agencies have recently 23

recognized that the DCF models are currently understating the cost of 24

equity. For example, in Opinion No. 531, the FERC recently recognized 25

that the inputs to the DCF model have been affected by anomalous market 26




Overall Mean Results – Projected GDP Growth

8.98% 8.95% 8.77%

Overall Mean Results – Historical GDP Growth

9.73% 9.71% 9.53%


conditions and therefore for the first time, is considering the use of other 1

ROE estimation models. 2

[W]e also understand that any DCF analysis may be affected by 3 potentially unrepresentative financial inputs to the DCF 4 formula, including those produced by historically anomalous 5 capital market conditions. Therefore, while the DCF model remains 6 the Commission’s preferred approach to determining allowed rate of return, 7 the Commission may consider the extent to which economic anomalies may 8 have affected the reliability of DCF analyses in determining where to set a 9 public utility’s ROE within the range of reasonable returns established by 10 the two-step constant growth DCF methodology.19 11

12

Q. HAS THE FERC PROVIDED ANY GUIDANCE ON HOW IT PLANS TO ADDRESS13

THE ANOMALOUS CONDITIONS IN THE MARKET THAT AFFECT THE 14

ASSUMPTIONS USED IN THE DCF MODEL? 15

A. Yes, the FERC has traditionally relied on the mean of the range of results 16

from the DCF model, which they refer to as the “zone of reasonableness.” 17

In Opinion No. 531, the FERC indicated that it will look at other ROE 18

estimation methodologies to inform their judgment as to where, within the 19

zone of reasonableness, the ROE should be set. In particular, the FERC 20

found risk premium based approaches informative. 21

We are concerned that market conditions in the record are 22 anomalous, thereby making it more difficult to determine the 23 return necessary for public utilities to attract capital. In these 24 circumstances, we have less confidence that the midpoint of 25 the zone of reasonableness established in this proceeding 26 accurately reflects the equity returns necessary to meet the Hope 27 and Bluefield capital attraction standards. We find it is necessary 28 and reasonable to consider additional record evidence, 29 including evidence of alternative benchmark methodologies 30 and state commission-approved ROEs, to gain insight into the 31

19 147 FERC ¶ 61,234, para. 41. (Emphasis added.)


potential impacts of these unusual capital market conditions on 1 the appropriateness of using the resulting midpoint.20 2

3

The NETOs [New England Transmission Owners] presented 4 five alternative benchmark methodologies in this proceeding: 5 risk premium analysis, the CAPM, comparison of electric 6 ROEs with natural gas pipeline ROEs, comparison of electric 7 utility DCF results with non-utility DCF results, and expected 8 earnings analysis. Of those five, we find the risk premium 9 analysis, the CAPM, and expected earnings analyses 10 informative, and each produces a midpoint (or median) ROE 11 higher than the midpoint of our DCF analysis here. In 12 considering these other methodologies, we do not depart from 13 our use of the DCF methodology; rather, we use the record 14 evidence to inform the just and reasonable placement of the 15 ROE within the zone of reasonableness established in the 16 record by the DCF methodology.21 17

18

[W]e conclude that a mechanical application of the DCF methodology with 19 the use of the midpoint here would result in an ROE that does not satisfy 20 the requirements of Hope and Bluefield. Therefore, based on the record in 21 this case, including the unusual capital market conditions present, we 22 conclude that the just and reasonable base ROE for the NETOs should 23 be set halfway between the midpoint of the zone of reasonableness and the 24 top of the zone of reasonableness.22 25

26

Consistent with the FERC’s approach, I have also considered the results of 27

alternative risk premium methodologies to test the reasonableness of the 28

DCF results. 29

20 147 FERC ¶ 61,234, para. 145. 21 147 FERC ¶ 61,234, para. 146. 22 147 FERC ¶ 61,234, para. 142. (Emphasis added.)


D. CAPM Analysis 1

Q. PLEASE BRIEFLY DESCRIBE THE GENERAL FORM OF THE CAPM. 2

A. The CAPM is a risk premium approach that estimates the cost of equity for 3

a given security as a function of a risk-free return plus a risk premium (to 4

compensate investors for the non-diversifiable or “systematic” risk of that 5

security).23 As shown in Equation [3], the CAPM is defined by four 6

components, each of which must theoretically be a forward-looking 7

estimate: 8

Ke = rf + β(rm – rf) [3] 9

where: 10

Ke = the required ROE for a given security; 11

rf = the risk-free rate of return; 12

β = Beta of an individual security; and 13

rm = the required return for the market as a whole. 14

15

The term (rm – rf) represents the Market Risk Premium (“MRP”). According 16

to the theory underlying the CAPM, since unsystematic risk can be 17

diversified away, investors should be concerned only with systematic or non-18

diversifiable risk. Non-diversifiable risk is measured by Beta, which is 19

defined as: 20

21

22

where: 23

re = the rate of return for the individual security or portfolio. 24

23 Systematic risks are fundamental market risks that reflect aggregate economic measures and therefore cannot be mitigated through diversification. Unsystematic risks reflect company-specific risks that can be mitigated and ultimately eliminated through investments in a portfolio of companies and/or market sectors.

β = [4] )(

),(

m

me

rVariance

rrCovariance


The variance of the market return, noted in Equation [4], is a measure of the 1

uncertainty of the general market, and the covariance between the return on 2

a specific security and the market reflects the extent to which the return on 3

that security will respond to a given change in the market return. Thus, Beta 4

represents the risk of the security relative to the market. 5

6

Q. HAVE ECONOMIC AND FINANCIAL MARKET CONDITIONS AFFECTED THE7

CAPM? 8

A. Yes. Even though the Federal Reserve has discontinued its “Quantitative 9

Easing”, Treasury yields are near their lowest level in nearly 35 years. 10

Following the 2008 financial crisis, investors reacted to the extraordinary 11

levels of market volatility by investing in low-risk securities such as Treasury 12

bonds (i.e., a “flight to quality”). Given the extraordinarily low level of 13

interest rates as compared to historical levels, using current or even near-14

term projections of government bond yields would distort market 15

expectations for a reasonable risk-free rate. Using the five-year forecast of 16

bond yields helps alleviate these short-term market factors affecting the risk 17

free rate. Interest rates are expected to increase as the economy continues to 18

expand. 19

20

Q. WHAT RISK-FREE RATE DID YOU USE IN YOUR CAPM ANALYSIS? 21

A. Since both the DCF and CAPM models assume long-term investment 22

horizons, I used the Blue Chip forecast of the yield on 30-year Treasury 23

bonds for 2017-2021 of 4.80 percent as my estimate of the risk-free rate.24 24

24 Blue Chip Financial Forecasts, June 1, 2015, at 14.


Q. WHAT MEASURES OF THE BETA COEFFICIENT DID YOU USE IN YOUR CAPM1

ANALYSIS? 2

A. I considered two separate Beta coefficients for the proxy group companies: 3

(1) the Bloomberg Beta coefficients (which are calculated using 24 months 4

of weekly data); and (2) the reported Value Line Beta coefficients (which are 5

calculated using 60 months of weekly data). My calculations for Beta are 6

provided on Exhibit___(JMC-1), Schedule 7.1. 7

8

Q. WHAT MARKET RISK PREMIUM (“MRP”) DID YOU USE IN YOUR CAPM9

ANALYSIS? 10

A. I conducted a Constant Growth DCF analysis on each of the S&P 500 Index 11

companies and calculated an expected total market return, weighted by 12

market capitalization. This market return is that implied by current stock 13

prices and projected earnings growth for each of these companies. I then 14

used the MRP that results from deducting the risk-free rate (based on the 15

five-year forecast of the 30-year Treasury bond) from that market return. 16

This analysis results in an 8.60 percent MRP, as shown on Exhibit___(JMC-17

1), Schedule 7.2, page 1. 18

19

Q. WHY DID YOU NOT USE A HISTORICAL MRP? 20

A. The CAPM is inherently a forward-looking model since it is designed to 21

estimate investors’ required equity return expectations. The MRP should, 22

therefore, reflect investors’ expected equity market returns relative to 23

expected returns on Treasury securities. While these return expectations 24

may be informed by history, they should primarily reflect forward-looking 25

return expectations. 26


Q. WHAT ARE THE RESULTS OF YOUR CAPM ANALYSES? 1

A. As provided in Exhibit___(JMC-1), Schedule 7.3, the forward-looking 2

CAPM results are 10.49 percent (using Bloomberg Betas) and 11.39 percent 3

(using Value Line Betas), or an average of 10.94 percent. These forward-4

looking CAPM results are higher than the Constant Growth and Multi-Stage 5

DCF results. 6

7

E. Risk Premium Analysis 8

Q. PLEASE DESCRIBE THE RISK PREMIUM APPROACH THAT YOU USED. 9

A. In general terms, this approach recognizes that equity is riskier than debt 10

because equity investors bear the residual risk associated with ownership. 11

Equity investors, therefore, require a greater return (i.e., a premium) than a 12

bondholder would. The Risk Premium approach estimates the cost of equity 13

as the sum of the Equity Risk Premium and the yield on a particular class of 14

bonds. 15

ROE = RP + Y [5] 16

Where: 17

RP = Risk Premium (difference between allowed ROE and the 18

respective bond yield); and 19

Y = Applicable bond yield. 20

21

Since the equity risk premium is not directly observable, it typically is 22

estimated using a variety of approaches, some of which incorporate ex-ante, 23

or forward-looking estimates of the cost of equity, and others that consider 24

historical, or ex-post, estimates. I have relied on authorized returns from a 25

large sample of U.S. integrated electric utilities. 26


Q. WHAT DID YOUR RISK PREMIUM ANALYSIS REVEAL? 1

A. To estimate the relationship, I conducted a regression analysis using the 2

following equation: 3

RP = a + (b x Y) [6] 4

Where: 5

a = Intercept term 6

b = Slope term 7

8

Data regarding allowed ROEs were provided by Regulatory Research 9

Associates. The data includes 598 integrated electric utility rate cases from 10

January 1993 through September 30, 2015. 11

12

My first risk premium analysis finds the relationship between quarterly 13

average allowed ROEs for all U.S. integrated electric utilities and the 14

respective 30-year Treasury yield from the relevant quarter. The results of 15

that regression are detailed in Figure 4. 16

Figure 4 17 Risk Premium Regression Results vs. 30-Year Treasury Yield 18

19

20

21

22

23

24

25

26

y = -0.567x + 0.0857 R² = 0.7138

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%

Ris

k P

rem

ium

U.S. Government 30-year Treasury Yield


As illustrated by Figure 4, the risk premium varies with the level of bond 1

yield and generally increases as bond yields decrease, and vice versa. Given 2

this relationship, I then consider three estimates of the 30-year Treasury 3

yield, including the current 30-day average, a “Near-Term” Blue Chip 4

consensus forecast for Q3 2015-Q4 2016, and a “Long-Term” Blue Chip 5

consensus forecast for 2017-2021. I find this “Long-Term” result to be 6

most applicable because investors typically have a multi-year view of their 7

required returns on equity, and because NSPM is proposing a multi-year rate 8

plan in Minnesota in this proceeding. As shown on Exhibit___(JMC-1), 9

Schedule 8.1, page 2, from 1993 through September 30, 2015, the average 10

implied risk premium for these Treasury yield estimates is 6.47 percent. 11

Based on the regression coefficients provided in Schedule 8.1, page 2, which 12

allow for the estimation of the risk premium at varying bond yields, the 13

results of my analysis are shown in Table 4. 14

15

Table 4 16 Risk Premium Results Using 30-Year Treasury Yield 17

18

19

20

21

22

23

24

Q. WHY IS IT IMPORTANT TO CONSIDER AUTHORIZED ROES IN OTHER25

JURISDICTIONS? 26

Using 30-Day Average Yield

on 30-Year Treasury Bond

Using Near-Term Forecast for Yield

on 30-Year Treasury Bond1

Using Long-Term Forecast for Yield

on 30-Year Treasury Bond1

Yield 2.92% 3.40% 4.80%

Risk Premium 6.91% 6.64% 5.85%

Resulting ROE 9.83% 10.04% 10.65%


A. Authorized ROEs in other jurisdictions are a significant part of the market 1

information that investors consider when evaluating their investment 2

alternatives. The level of authorized ROE also provides a signal to investors 3

about the level of regulatory support that a utility company can expect to 4

receive with regard to maintaining its ability to compete for capital and its 5

financial integrity. An authorized ROE that is significantly below the 6

national average for a given period may be an impediment to the Company’s 7

ability to attract capital and invest in infrastructure necessary to provide safe, 8

reliable service to its customers. NSPM expects to invest approximately $6.0 9

billion in infrastructure in the 2015-2019 period. Relative risk factors, such 10

as electric generation in the asset mix, or periods of elevated capital 11

spending, such as NSPM’s current capital spending program, may justify 12

higher than average allowed ROEs. 13

14

Q. HAVE YOU CONSIDERED AN ADDITIONAL RISK PREMIUM ANALYSIS? 15

A. Yes, as an alternative to the Treasury Yield Risk Premium analysis described 16

above, I have performed a similar analysis using historical A-rated utility 17

bond yields to calculate the risk premium. A Blue Chip forecast, which I 18

included in the Treasury yield version of the model, is not available for the 19

A-rated utility bond yield. I therefore derived a forecast for the A-rated 20

utility bond yield using historical spreads between 30-year Treasury bonds 21

and the Moody’s A-rated utility bond index. The average spread between 22

the 30-year Treasury bond yield and the A-rated utility bond yield since the 23

financial crisis – assumed for this purpose to be the fourth quarter of 2008 – 24

has been 1.33 percent. I add this spread to the Blue Chip consensus 25

forecasts referenced above to arrive at a Near-Term forecast of 4.73 percent, 26

and a Long-Term forecast of 6.13 percent. Inserting these forecasts for the 27


A-rated utility bond yield into the regression equation provides the results 1

shown in Table 5. My calculations are shown on Exhibit___(JMC-1), 2

Schedule 8.2. The results of this analysis reasonably track the Risk Premium 3

results using the 30-Year Treasury Yield. 4

5 Table 5 6

Risk Premium Results vs. A-Rated Utility Bond Yield 7

8

9

10

11

12

13

14

As noted earlier, I find that the Risk Premium results based on the five-year 15

forecast for the 30-year Treasury bond are most applicable since they are 16

forward-looking, and investors typically have a multi-year forward view of 17

their estimates of the cost of equity. Therefore, for purposes of my range of 18

analytical results, I draw from my Bond Yield Plus Risk Premium model the 19

results of 10.65 percent (referring to the average result from Table 4 as 20

applied to the 5-year forecast) and 10.62 percent (referring to the average 21

result from Table 5 as applied to the 5-year forecast). 22

23

VIII. BUSINESS RISKS24

25

Q. ARE THERE FACTORS SPECIFIC TO NSPM’S OPERATING ENVIRONMENT THAT26

YOU CONSIDERED IN YOUR ROE RECOMMENDATION? 27

Using 30-Day Average Yield on

A-Rated Utility Bond

Using Near-Term Forecast for

A-Rated Utility Bond1

Using Long-Term Forecast for

A-Rated Utility Bond1

Yield 4.35% 4.73% 6.13%

Risk Premium 5.51% 5.29% 4.49%

ROEs 9.86% 10.02% 10.62%


A. Yes, there are several additional factors that have a direct bearing on the 1

Company’s ability to earn a fair return and on the Company’s riskiness 2

relative to the proxy group, including NSPM’s relatively high level of capital 3

expenditures. I also considered the effect of the proposed multi-year rate 4

plan on the authorized ROE, given the current low interest rate environment 5

and investor expectations for higher interest rates over the terms of the 6

proposed rate plan. These factors increase NSPM’s risk relative to the proxy 7

group and support an ROE above the mean for the proxy group companies. 8

9

A. Capital Expenditure Risk 10

Q. PLEASE SUMMARIZE THE COMPANY’S CAPITAL EXPENDITURE PLAN. 11

A. NSPM estimates that between 2015 and 2019 it will invest approximately 12

$6.0 billion in capital, or more than $1.2 billion per year over that period, 13

with the majority of that spending in Minnesota.25 Those expenditures 14

represent approximately 55.4 percent of the Company’s total net utility plant 15

in service as of December 31, 2014.26 16

17

Q. DOES THE INVESTMENT COMMUNITY RECOGNIZE THE RISKS ASSOCIATED18

WITH ELEVATED LEVELS OF CAPITAL EXPENDITURES? 19

A. Yes. From a credit perspective, the additional pressure on cash flows 20

associated with high levels of capital expenditures exerts corresponding 21

pressure on credit metrics and, therefore, credit ratings. S&P has noted: 22

[T]here is little doubt that the U.S. electric industry needs to 23 make record capital expenditures to comply with the proposed 24 carbon pollution rules over the next several years, while 25

25 Source: Direct Testimony of Company witness Mr. Brian J. Van Abel, at Schedule 3. 26 NSPM’s net utility plant at December 31, 2014 was $10.86 billion, per Company 2014 FERC Form 1.


maintaining safety standards and grid stability. We believe the 1 higher capital spending and subsequent rise in debt levels could 2 strain these companies’ financial measures, resulting in an 3 almost consistent negative discretionary cash flow throughout 4 this higher construction period. To meet the higher capital 5 spending requirements, companies will require ongoing and 6 steady access to the capital markets, necessitating that the 7 industry maintains its high credit quality. We expect that 8 utilities will continue to effectively manage their regulatory risk 9 by using various creative means to recover their costs and to 10 finance their necessary higher spending.27 11

12

Q. HOW DOES THE LEVEL OF THE COMPANY’S EXPECTED CAPITAL13

EXPENDITURES COMPARE TO THE PROXY GROUP? 14

A. As shown on Exhibit___(JMC-1), Schedule 9.1, I calculated the ratio of 15

forecasted capital expenditures for the period from 2015-2019 to total net 16

utility plant as of December 31, 2014 for NSPM and the proxy group 17

companies. Exhibit___(JMC-1), Schedule 9.2 (see also Figure 5) 18

demonstrates that NSPM’s ratio of capital expenditures as a percentage of 19

net utility plant of 55.4 percent is higher than nine of the thirteen proxy 20

group companies and higher than the median for the proxy group 21

companies of 50.3 percent. 22

27 Standard and Poor’s, Ratings Direct, “U.S. Regulated Electric Utilities’ Annual Capital Spending Is Poised to Eclipse $100 Billion,” July 2014.


Figure 5 1 Comparison of Capital Expenditures – Proxy Group Companies 2

3

4

5

6

7

8

9

10

11

12

13

14

15

The absolute magnitude of NSPM’s capital investment requirements ($6.0 16

billion over the next five years) requires timely cost recovery. NSPM has not 17

been able to earn its authorized return in Minnesota in recent years. For 18

example, in 2014, NSPM’s actual earned ROE (weather-normalized) for its 19

Minnesota electric utility operations was 8.39 percent, as compared to an 20

authorized ROE of 9.72 percent.28 21

22

Q. WHAT ARE YOUR CONCLUSIONS REGARDING THE EFFECT OF THE23

COMPANY’S CAPITAL INVESTMENT PLAN ON ITS COST OF EQUITY? 24

A. Because NSPM is projecting a substantial capital expenditure program over 25

the next five years, it is reasonable to conclude that the Company will require 26

continued access to capital markets to finance these investments. The 27

28 Xcel Energy Investor Presentation, September 9, 2015, at 32.

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

GXP IDA ALE OGE EDE AEP PNW PNM AEE NSPM DUK EE WR LNT

2015-1

9 C

ap

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investment community recognizes the additional risks associated with 1

substantial capital expenditures. Therefore, the magnitude of the Company’s 2

capital expenditure plan suggests that NSPM has an above average risk 3

profile, and emphasizes the importance of timely cost recovery and capital 4

market access on favorable terms for the benefit of both customers and 5

shareholders. 6

7

B. Multi-Year Rate Plan 8

Q. PLEASE EXPLAIN HOW NSPM’S PROPOSAL TO IMPLEMENT A MULTI-YEAR9

RATE PLAN IN THIS PROCEEDING AFFECTS THE AUTHORIZED ROE FOR10

NSPM. 11

A. As discussed in the testimony of Company witnesses Mr. Chandarana and 12

Mr. Burdick, NSPM is proposing to implement a multi-year rate plan 13

(“MYRP”) with a term of three years. Given the current low interest rate 14

environment and investor expectations for increases in interest rates over the 15

next few years, the proposed MYRP creates a degree of incremental risk for 16

equity investors if the authorized ROE is fixed. To address this incremental 17

risk, regulatory bodies often approve a mechanism to index the authorized 18

ROE over the term of a MYRP. However, in an effort to minimize the 19

number of potentially disputed issues in this proceeding, NSPM is proposing 20

to fix the authorized ROE of 10.0 percent for the full three-year term of the 21

MYRP. 22

23

Q. IN ITS PROPOSAL, NSPM HAS ALSO OFFERED TO IMPLEMENT A MYRP WITH24

A FIVE-YEAR TERM RATHER THAN THREE YEARS. HOW WOULD THAT25

LONGER TERM AFFECT THE COMPANY’S RISK? 26


A. The longer term of five years would result in more incremental risk for 1

equity investors. If the Commission adopts the MYRP with a five-year term, 2

in order to mitigate the risk associated with the longer term, I would 3

recommend that the authorized ROE for NSPM be subject to change on an 4

annual basis according to a formula that considers the change in the yield on 5

the Moody’s A-rated utility bond index. A coefficient that takes into 6

account the inverse relationship between interest rates and equity returns 7

would determine the ROE adjustment. 8

9

Q. IS THERE EVIDENCE THAT INVESTORS PERCEIVE INCENTIVE RATE PLANS10

WITH LONGER TERMS AS BEING MORE RISKY? 11

A. Yes. In Canada, where incentive rate plans (also known as performance-12

based rate plans) are relatively common for regulated utilities, Dominion 13

Bond Rating Service (“DBRS”) has commented on the relative risk of these 14

plans based on the length of the term. Specifically, “DBRS views COS [cost 15

of service] as lower risk than IRM [incentive regulation mechanism]. In 16

addition, DBRS also considers the length of an IRM period between COS 17

years. DBRS’s scoring system gives a higher score for a shorter IRM 18

period.”29 19

20

Q. PLEASE ELABORATE ON HOW THE ROE ADJUSTMENT WOULD WORK. 21

A. In the second through the fifth years of the MYRP, the Commission would 22

adjust the authorized ROE for NSPM based on the difference between the 23

30-day average yield on the Moody’s A-rated utility bond index at the time 24

the formula is implemented and the 30-day average yield on the Moody’s A-25

29 DBRS, “Industry Study: Assessing Regulatory Risk in the Utilities Sector,” May 2012, at 8.


rated utility bond index at the end of each 12-month period in the MYRP. 1

This difference would then be multiplied by the coefficient from my Bond 2

Yield Plus Risk Premium analysis of 0.57 (see Schedule 8.2) to determine the 3

ROE adjustment in Year 2. The adjustment factor reflects the inverse 4

relationship between interest rates and equity costs; that is, the cost of equity 5

changes less than the change in utility bond yields. Exhibit___(JMC-1), 6

Schedule 10 illustrates the results of the proposed ROE adjustment 7

mechanism under both increasing utility bond yields (Scenario #1) and 8

decreasing utility bond yields (Scenario #2). 9

10

Q. WHY ARE YOU PROPOSING TO BASE THE ROE ADJUSTMENT ON CHANGES IN11

UTILITY BOND YIELDS RATHER THAN GOVERNMENT BOND YIELDS? 12

A. Government bond yields are heavily influenced by monetary policy and, in 13

recent years, interest rates on government bonds have been artificially 14

reduced as the Federal Reserve has sought to stimulate the domestic 15

economic by holding government bond yields at extraordinarily low levels. 16

By contrast, the yield on corporate bonds, such as the Moody’s A-rated 17

utility bond index, takes into consideration the effect of changes in 18

economic and capital market conditions because it is not controlled by 19

Federal monetary policy. The California Public Utilities Commission has 20

observed that changes in the utility bond yield are more reflective of changes 21

in the cost of equity for utilities than are changes in the government bond 22

yield. Specifically the California PUC explains its rationale as follows: 23

The purpose of an interest rate benchmark is to gauge changes 24 in interest rates that also indicate changes in equity costs for 25 utilities. U.S. Treasuries are more sensitive to economic 26 changes and risks in the international capital markets than 27 utility bonds because they are bought and sold globally. 28


However, U.S. utility bonds are generally affected less than 1 Treasuries as a result of major shifts of international capital 2 because a majority of U.S. utility bonds are traded within the 3 U.S. Consistent with our use of utility bond interest rates in 4 ROE, PBR, and MICAM proceedings and desire to use an 5 index that more closely correlates and moves with utility 6 industry risk, utility bonds should be adopted for the CCM 7 [cost of capital mechanism] index.30 8

9

For these reasons, I believe the ROE adjustment mechanism for NSPM 10

should be based on changes in utility bond yields. 11

12

Q. HAVE SIMILAR ADJUSTMENT MECHANISMS BEEN APPROVED IN OTHER13

JURISDICTIONS? 14

A. Yes. In 2008, the California PUC adopted an ROE formula that allows for 15

changes in the authorized ROE based on changes in the Moody’s utility 16

bond index if interest rates change by more than 100 basis points over a 12-17

month period. In 2009, the Ontario Energy Board modified its ROE 18

adjustment formula, which had previously been based entirely on changes in 19

government bond yields, to include both changes in government and 20

corporate bond yields. This revised approach has worked reasonably well 21

since 2009, and has been generally well-received by utilities and stakeholders. 22

23

Q. DO YOU PROPOSE TO MAKE A SPECIFIC RISK ADJUSTMENT TO YOUR RESULTS24

BASED ON NSPM’S CAPITAL EXPENDITURES PROGRAM OR THE COMPANY’S25

PROPOSED MULTI-YEAR RATE PLAN? 26

30 California Public Utilities Commission, Application 07-05-003, 07-05-007, and 07-05-008, proposed decision of ALJ Galvin, mailed April 29, 2008, at 13.


A. No, I do not. While there may be some incremental risk associated with 1

NSPM’s recovery of its substantial forecast capital expenditure program, that 2

risk is likely to be offset by the generally supportive regulatory environment 3

in Minnesota. The market’s expectation for higher interest rates adds some 4

degree of incremental risk for NSPM under the MYRP, especially under the 5

longer five-year term, unless there is an adjustment mechanism that allows 6

the Company to adjust the authorized ROE for changes in utility bond 7

yields. While I have not made an explicit quantitative adjustment to my 8

ROE results, I do consider these additional risks when recommending my 9

ROE among the range of results. 10

11

IX. CAPITAL STRUCTURE12

13

Q. WHAT COMMON EQUITY RATIO IS THE COMPANY PROPOSING? 14

A. NSPM is proposing a 52.50 percent common equity ratio, as discussed in the 15

testimony of Company witness Mr. Van Abel. 16

17

Q. HOW DOES NSPM’S PROPOSED CAPITAL STRUCTURE COMPARE TO THE18

PROXY GROUP COMPANIES? 19

A. As shown in Exhibit___(JMC-1), Schedule 11, NSPM’s proposed equity 20

ratio is slightly lower than the average of the proxy group companies at the 21

operating company level, which for the four quarters ending with the second 22

quarter of 2015 have common equity ratios ranging from 50.12 percent to 23

66.46 percent, with a mean common equity ratio of 54.47 percent. I 24

therefore see no need to make an adjustment to my recommended ROE as a 25

result of NSPM’s proposed capital structure. 26

27


X. SUMMARY AND CONCLUSIONS 1

2

Q. WHAT IS THE RANGE OF RESULTS PRODUCED BY THE VARIOUS COST OF3

EQUITY ANALYSES? 4

A. Table 6 summarizes the results of my DCF, CAPM and Risk Premium 5

analyses. 6

Table 6 7 Summary of ROE Model Results 8

DCF – 90 DAY AVERAGE

Constant Growth 9.35%

Multi-Stage – Forecasted GDP Growth 8.95%

Multi-Stage – Historical GDP Growth 9.71%

CAPM

Value Line Beta 11.39%

Bloomberg Beta 10.49%

Bond Yield Plus Risk Premium

30-Year U.S. Treasury 10.65%

Moody’s A-rated Utility Bond Index 10.62%

9

Q. PLEASE SUMMARIZE YOUR ROE RECOMMENDATION BASED ON THE RESULTS10

OF THESE VARIOUS ROE ESTIMATION MODELS. 11

A. The results range from a low of 8.95 percent for the Multi-Stage DCF 12

analysis using forecasted GDP growth (Overall Mean result) to a high of 13

11.39 percent for the forward-looking CAPM analysis using Value Line 14

betas. I recommend an ROE of 10.0 percent for the Company, which is 15

slightly lower than the midpoint of the range of 10.17 percent. My 16

recommendation is based on the following conclusions: 17


1. The cost of equity is a forward-looking estimate. Given the1

extraordinarily low interest rate environment and investor2

expectations for higher interest rates, as well as credit spreads between3

government bonds and utility bonds that have been increasing steadily4

throughout 2015, ROE models in general may underestimate the cost5

of equity unless reasonable adjustments are made to the model inputs6

to reflect projected capital market conditions;7

2. The DCF model may be underestimating the ROE given the low8

dividend yields and high stock valuations for utility companies.9

Consideration of the results of multiple ROE estimation10

methodologies is appropriate. The FERC has recently recognized11

that it is necessary to also consider the results of the CAPM analysis12

as a test of the reasonableness of the DCF results under current13

market conditions;14

3. The results of CAPM and Risk Premium models that rely on forward-15

looking inputs for the risk-free rate should be given some weight16

during a period when interest rates are projected to increase17

substantially from current levels;18

4. NSPM’s substantial ongoing capital expenditures program relative to19

the proxy group may subject the Company to a higher risk of20

recovering these amounts; and21

5. The Company’s proposed multi-year rate plan adds to the incremental22

investment risk of NSPM. If a five-year MYRP is adopted, the risk of23

that longer-term plan should be mitigated through implementation of24

an adjustment mechanism that allows for changes to the authorized25

ROE based on changes in utility bond yields.26


On balance, I believe 10.0 percent represents a fair determination of the 1

Company’s cost of equity. Furthermore, I agree with the Company’s 2

proposal to fix the ROE at 10.0 percent if the three-year MYRP is approved. 3

Alternatively, if the Commission approves a five-year MYRP, I recommend 4

that NSPM be allowed to adjust its authorized ROE in Years 2 through 5 of 5

the MYRP based on changes in utility bond yields. This adjustment 6

mechanism will mitigate the risk that the authorized ROE for NSPM does 7

not reflect capital market conditions over the duration of the rate plan. 8

9

Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? 10

A. Yes, it does. 11

RÉSUMÉ OFJAMES M. COYNE

James M. Coyne Senior Vice President

Mr. Coyne provides financial, regulatory, strategic, and litigation support services to clients in the natural gas, power, and utilities industries. Drawing upon his industry and regulatory expertise, he regularly advises utilities, public agencies and investors on business strategies, investment evaluations, and matters pertaining to rate and regulatory policy. Prior to Concentric, Mr. Coyne worked in senior consulting positions focused on North American utilities industries, in corporate planning for an integrated energy company, and in regulatory and policy positions in Maine and Massachusetts. He has authored numerous articles on the energy industry and provided testimony and expert reports before the Federal Energy Regulatory Commission and numerous jurisdictions in the U.S. and Canada. Mr. Coyne holds a B.S. in Business from Georgetown University with honors and an M.S. in Resource Economics from the University of New Hampshire.

REPRESENTATIVE PROJECT EXPERIENCE Expert Testimony Experience

• FortisBC Energy Inc.: Before the British Columbia Utilities Commission, provided expert testimonyon the cost of capital and business risk for the Company’s BC gas distribution operations. (DocketNo._)

• Green Mountain Power Company: Before the Vermont Public Service Board, provided experttestimony on the cost of capital for the Company’s Vermont Electric Utility Business. (Docket No.8191)

• Northern States Power Company: Before the Public Service Commission of Wisconsin, providedexpert testimony on the cost of capital for the company’s Wisconsin electric and natural gas utilityoperations. (Docket No. 4220-UR-119)

• Hydro Quebec: Before the Régie de l’énergie, filed expert testimony on the cost of capital and businessrisk for the Company’s Québec electric transmission and distribution businesses, with JohnTrogonoski. (R-3842-2013)

• Enbridge: Before the Ontario Energy Board, filed expert testimony with Jim Simpson and MelissaBartos in support of the Company’s proposed 2nd Generation Incentive Regulation plan. Our workfocused on development of a proposed plan consistent with the OEB’s objectives for such plans, whilerecognizing the Company’s operating environment and business objectives, and capitalizing on theexperience with other IR programs. Concentric conducted a series of analyses, including industrybenchmarking, and productivity analyses for the industry and Enbridge using both total factorproductivity “TFP” analysis and partial factor productivity (“PFP”) analysis. These analyses producedproductivity measures (“X factors”) for both Enbridge and the industry peer group that were utilizedto test parameters for the proposed IR plan. Concentric also evaluated alternative measures of inflation(“I factors”) for utility inputs. Lastly, we examined Enbridge’s anticipated 2014 to 2016 costs, andevaluated the ability of a traditional I-X framework to accommodate the Company’s cost profile. (EB-2012-0459)

• Gaz Métro: Before the Régie de l’énergie, filed expert testimony on the cost of capital, business risk,and capital structure for the Company’s Québec gas distribution operations. (R-3809-2012)

• Startrans IO, LLC: Before the Federal Energy Regulatory Commission, filed expert testimony on theappropriate cost of equity for the Startrans transmission facilities in Nevada and California, and the

Northern States Power Company Docket No. E002/GR-15-826Exhibit___(JMC-1), Schedule 1

Page 1 of 7


CONCENTRIC ENERGY ADVISORS, INC. PAGE 2

economic and business environment for transmission investments. (FERC Dockets Nos. ER13-272-000, and EL13-26-000)

• Nova Scotia Power: Before the Nova Scotia Utility and Review Board, provided direct and rebuttalevidence on the business risk of Nova Scotia Power in relation to its North American peers forpurposes of determining the appropriate cost of capital. (Docket No. 2013 GRA)

• FortisBC Utilities: Before the British Columbia Utilities Commission, provided direct evidence and asupporting study on formulaic approaches to the determination of the cost of capital. (BCUC 2012Generic Cost of Capital Proceeding)

• Northern States Power Company: Before the South Dakota Public Utilities Commission providedexpert testimony on the appropriate cost of capital for the company’s South Dakota electric utilityoperations. (Docket No. EL12 - )

• Vermont Gas Systems, Inc: Before the Vermont Public Service Board, filed expert testimony on theappropriate cost of equity and capital structure. (Docket No. 7803A)

• Northern States Power Company: Before the South Dakota Public Utilities Commission, providedexpert testimony on the appropriate cost of capital for the company’s South Dakota electric utilityoperations. (Docket No. EL11-019)

• Public Service Commission of Wisconsin: Provided expert testimony on the cost of capital for thecompany’s Wisconsin electric and natural gas utility operations. (Docket No. 4220-UR-117)

• Atlantic Path 15, LLC: Before the Federal Energy Regulatory Commission, filed expert testimony onthe appropriate rate of return for the Path 15 transmission facilities in California, and the economicand business environment for transmission investments. (FERC Dockets Nos. ER11-2909 and EL11-29)

• Enbridge: Cost of capital witness for the company’s 2013 rate filing, providing testimony onrecommended ROE and capital structure for the company’s Ontario gas distribution business, and aseparate benchmarking analysis designed to illustrate the efficiency of the company’s operations inrelation to its’ North American peers. (EB-2011-0354)

• Northern States Power Company: Before the Public Service Commission of Wisconsin, providedexpert testimony on the cost of capital for the company’s Wisconsin electric and natural gas utilityoperations. (Docket No. 4220-UR-117)

• FortisBC Energy, Inc: Provided a detailed study of alternative automatic adjustment mechanisms forsetting the cost of equity, filed with the British Columbia Public Utilities Commission, December,2010. (In response to BCUC Order No. G-158-09)

• Commonwealth of Massachusetts, Superior Court, Central Water District vs. Burncoat PondWatershed District: Provided expert testimony on the appropriate method for computing interest inan eminent domain taking. (Civil Action No. WDCV2001-01051, May 2010)

• Retained by the Ontario Energy Board to evaluate the existing DSM regulatory framework andguidelines for gas distributors, and based on research on best practices in other jurisdictions, makerecommendations and lead a stakeholder conference on proposed changes. (2009-2010)

• ATCO Utilities: Primary cost of capital witness on behalf of ATCO Utilities in the 2009 AlbertaGeneric Cost of Capital proceeding, for the establishment of the return on equity and capital structurefor each of Alberta’s gas and electric utilities. (AUC Proceeding ID. 85)

• Enbridge: Primary cost of capital witness before the Ontario Energy Board in its Consultative Processon the Board’s policy for determination of the cost of capital. (EB-2009-0084)

• Provided written comments to the Ontario Energy Board on behalf of Enbridge Gas Distribution, andseparately for Hydro One Networks and the Coalition of Large Distributors in response to the Board'sinvitation to interested stakeholders to provide comments to help the Board better understand whethercurrent economic and financial market conditions have an impact on the reasonableness of the Cost


Page 2 of 7



of Capital parameter values calculated in accordance with the Board’s established Cost of Capital methodology; and to help the Board determine if, when, and how to make any appropriate adjustments to those parameter values. (2009)

• Atlantic Path 15, LLC: Before the Federal Energy Regulatory Commission, provided expert testimonyon the appropriate rate of return, capital structure, and rate incentives for the development andoperation of the Path 15 transmission facilities in California. (FERC Docket ER08-374-000)

• Wisconsin Power and Light Company: Before the Public Service Commission of Wisconsin, onestablishing ratemaking principles for the company’s proposed wind and coal electric generation facilityadditions, providing expert testimony on the appropriate return on equity. (PSCW Docket Nos. 6680-CE-170 and 6680-CE-171, 2007)

• Aquarion Water Company: Before the Connecticut Department of Public Utility Control, providingexpert testimony on establishing the appropriate return on equity for the Company’s Connecticutoperations. (DPUC Docket No. 07-05-19, 2007)

• Central Maine Power Company: Before the Maine Public Utilities Commission, provided experttestimony on the theoretical and analytical soundness of the Company’s sales forecast for ratemakingpurposes. (MPUC Docket No. 2007-215, 2007)

• Vermont Gas Systems, Inc.: Before the State of Vermont Public Board, on the company’s petition forapproval of an alternative regulation plan, provided expert testimony on models of incentive regulationand their relative benefits for VGS and its ratepayers. (VPSB Docket No. 7109, 2006)

• Texas New Mexico Power Company: Before the Public Utility Commission of Texas, on the approvalof the company’s stranded cost recovery associated with the auction of the company’s generatingassets. (PUC Docket No. 29206, 2004)

• TransCanada Corporation: Provided an independent expert valuation of a natural gas pipeline, filedwith the American Arbitration Association. (AAA Case No. 50T 1810018804, 2004)

• Advised the Board of Directors of El Paso Corporation on settlement matters pertaining to westernpower and gas markets before FERC. (2003)

• Conectiv: Before the New Jersey Board of Public Utilities, on the approval of the proposed sale ofAtlantic City Electric Company’s fossil and nuclear generating assets. (NJBPU Docket No.EM00020106, 2000-2001)

• Bangor Hydro Electric Company: Before the Maine Public Utilities Commission, on the approval ofthe proposed sale of the company’s hydroelectric and fossil generation assets. (MPUC Docket No.98-820, 1998)

• Maine Office of Energy Resources: Before the Maine Public Utilities Commission on behalf of theMaine Office of Energy on the establishment of avoided costs rates for generators under PURPA.(1981-1982)

Regulatory Support Experience • Provided consulting services to Hydro One Networks for the Company’s 2015 – 2019 Custom

Distribution Rate Application to the OEB. Assisted the Company in developing its proposal forspecific performance metrics for the Plan; reviewed the comments of stakeholders on performancemetrics; reviewed the Company’s existing performance metrics; reviewed the fastest growing areas ofbudgeted expenditures for their performance metric potential; developed a set of recommendedmetrics for review with the Company; and assisted the Company with drafting its submission to theOEB. (2014)

• Advised the Ontario Power Authority (OPA) on appropriate efficiency metrics to utilize in measuringthe effectiveness of the organization in response to a directive by the Ontario Energy Board.Conducted research and analysis to examine efficiency metrics used in the industry to measure the


Page 3 of 7



effectiveness of organizations with similar responsibilities to those of the OPA. This analysis was designed to help facilitate the OPA’s recommended metrics to the OEB. (2013)

• Retained by Gaz Métro to provide an independent assessment of the comprehensive incentive ratemechanism designed to improve the performance of Gaz Métro, and evaluate the proposedmechanism resulting from the Company’s collaboration with a stakeholder working group. (R-3693-2009, 2011)

• For the Canadian Gas Association, facilitated workshops between Canadian regulators and utilityexecutives on regulatory and utility responses to a low carbon world, and drafted follow-up white paperto facilitate further discussion on emerging industry issues. (2010-2013)

• Retained by Ontario’s Coalition of Large Distributors (Enersource Hydro, Horizon Utilities, HydroOttawa, PowerStream, Toronto Hydro, and Veridian Connections) to examine the cost of capital forOntario’s electric utilities in relation to those in other provinces and in the U.S. (2008)

• Retained by the Ontario Energy Board to analyze ROE awards for the past two years in Ontario, andcompare against other jurisdictions in Canada, the U.S., the U.K., and select other Europeanjurisdictions. Differences in awarded ROEs were examined for underlying factors, including ROEmethodology, company size, business risks, tax issues, subsidiary vs. parent, and sources of capital. Theanalysis also addressed the question of whether Canadian utilities compete for capital on the same basisas U.S. utilities. (2007)

• Retained by the Nantucket Planning and Economic Development Commission to educate governmentofficials and island residents on the wind industry, and provide analysis leading to constructive inputto the Army Corps of Engineers and the Minerals Management Service on the siting of proposed windprojects. (2004-2007)

• Interim manager of Government and Regulatory affairs for Boston Generating, LLC. Coordinateactivities and interventions before FERC, NE-ISO, state regulatory agencies, and local communitieshosting Boston Generating power plants. (2004)

• Facilitated the development of an Alternative Regulation Plan with the Department of Public Serviceand Vermont Gas Systems providing research and advice leading to a rate proposal for the VermontPublic Service Board. Conducted several workshops including the major stakeholders and regulatoryagencies to develop solutions satisfying both public policy and utility objectives. (2004-2005)

• For an independent power company, perform market analysis and annual audits of its utility powercontract. Services provided include verification of the contract price as a function of its indexcomponents, surveys of regional competitive energy suppliers, and analysis of regional spot prices foran independent benchmark. Meet with PUC staff to discuss and represent the company in its annualadjustment process, and report results to the company and its creditors. (2003-2004)

Areas of Expertise • Energy Regulation

o Rate policyo Cost of capitalo Incentive regulationo Fuels and power markets

• Management and Business Strategyo Fuels and power market assessmentso Investment feasibilityo Corporate and business unit planningo Benchmarking and productivity analysis


Page 4 of 7



• Financial and Economic Advisoryo Valuation analysiso Due diligenceo Buy and sell-side advisory

PUBLICATIONS AND RESEARCH • “Stimulating Innovation on Behalf of Canada’s Electricity and Natural Gas Consumers” (with Robert

Yardley), prepared for the Canadian Gas Association and Canadian Electricity Association, May, 2015.• “Autopilot Error: Why Similar U.S. and Canadian Risk Profiles Yield Varied Rate-making Results”

(with John Trogonoski), Public Utilities Fortnightly, May 2010• “A Comparative Analysis of Return on Equity of Natural Gas Utilities” (with Dan Dane and Julie

Lieberman), prepared for the Ontario Energy Board, June, 2007• “Do Utilities Mergers Deliver?” (with Prescott Hartshorne), Public Utilities Fortnightly, June 2006• “Winners and Losers: Utility Strategy and Shareholder Return” (with Prescott Hartshorne), Public

Utilities Fortnightly, October 2004• “Winners and Losers in Restructuring: Assessing Electric and Gas Company Financial Performance”

(with Prescott Hartshorne), white paper distributed to clients and press, August 2003• “The New Generation Business,” commissioned by the Electric Power Research Institute (EPRI) and

distributed to EPRI members to contribute to a series on the changes in the Power Industry, December2001

• Potential for Natural Gas in the United States, Volume V, Regulatory and Policy Issues (co-author),National Petroleum Council, December 1992

• “Natural Gas Outlook,” articles on U.S. natural gas markets, published quarterly in the Data ResourcesEnergy Review and Natural Gas Review, 1984-1989

SELECTED SPEAKING ENGAGEMENTS • “Innovations in Utility Business Models and Regulation”, The Canadian Association of Members of

Public Utility Tribunals (CAMPUT) 2015 Energy Regulation Course, Queens University, Kingston,Ontario, June 2015

• “M&A and Valuations,” Panelist at Infocast Utility Scale Solar Summit, September 2010• “The Use of Expert Evidence,” The Canadian Association of Members of Public Utility Tribunals

(CAMPUT) 2010 Energy Regulation Course, Queens University, Kingston, Ontario, June 2010• “A Comparative Analysis of Return on Equity for Utilities in Canada and the U.S.”, The Canadian

Association of Members of Public Utility Tribunals (CAMPUT) Annual Conference, Banff, Alberta,April 22, 2008

• “Nuclear Power on the Verge of a New Era,” moderator for a client event co-hosted by SutherlandAsbill & Brennan and Lexecon, Washington D.C., October 2005

• “The Investment Implications of the Repeal of PUCHA,” Skadden Arps Client Conference, NewYork, NY, October 2005

• “Anatomy of the Deal,” First Annual Energy Transactions Conference, Newport, RI, May 2005• “The Outlook for Wind Power,” Skadden Arps Annual Energy and Project Finance Seminar, Naples,

FL, March 2005• “Direction of U.S. M&A Activity for Utilities,” Energy and Mineral Law Foundation Conference,

Sanibel Island, FL, February 2002


Page 5 of 7



• “Outlook for U.S. Merger & Acquisition Activity,” Utility Mergers & Acquisitions Conference, SanAntonio, TX, October 2001

• “Investor Perspectives on Emerging Energy Companies,” Panel Moderator at Energy VentureConference, Boston, MA, June 2001

• “Electric Generation Asset Transactions: A Practical Guide,” workshop conducted at the 1999 ThaiElectricity and Gas Investment Briefing, Bangkok, Thailand, July 1999

• “New Strategic Options for the Power Sector,” Electric Utility Business Environment Conference,Denver, CO, May 1999

• “Electric and Gas Industries: Moving Forward Together,” New England Gas Association AnnualMeeting, November 1998

• “Opportunities and Challenges in the Electric Marketplace,” Electric Power Research Institute, July1998

PROFESSIONAL HISTORY

Concentric Energy Advisors, Inc. (2006 – Present) Senior Vice President Vice President

FTI Consulting (Lexecon) (2002 – 2006) Senior Managing Director – Energy Practice

Arthur Andersen LLP (2000 – 2002) Managing Director, Andersen Corporate Finance – Energy and Utilities

Navigant Consulting, Inc. (1996 – 2000) Managing Director, Financial Services Practice Senior Vice President, Strategy Practice

TotalFinaElf (1990 – 1996) Manager, Corporate Planning and Development Manager, Investor Relations Manager of Strategic Planning and Vice President, Natural Gas Division

Arthur D. Little, Inc. (1989 – 1990) Senior Consultant – International Energy Practice

DRI/McGraw-Hill (1984 – 1989) Director, North American Natural Gas Consulting Senior Economist, U.S. Electricity Service

Massachusetts Energy Facilities Siting Council (1982 – 1984) Senior Economist – Gas and Electric Utilities

Maine Office of Energy Resources (1981 – 1982) State Energy Economist


Page 6 of 7



EDUCATION

M.S., Resource Economics, University of New Hampshire, with Honors, 1981 B.S., Business Administration and Economics, Georgetown University, Cum Laude, 1975

DESIGNATIONS AND AFFILIATIONS

NASD General Securities Representative and Managing Principal (Series 7, 63 and 24 Certifications), 2001 NARUC, Advanced Regulatory Studies Program, Michigan State University, 1984 American Petroleum Institute, CEO’s Liaison to Management and Policy Committees, 1994-1996 National Petroleum Council, Regulatory and Policy Task Forces, 1992 President, International Association for Energy Economics, Dallas Chapter, 1995 Gas Research Institute, Economics Advisory Committee, 1990-1993 Georgetown University, Alumni Admissions Interviewer, 1988 – current


Page 7 of 7

Northern States Power Company Docket No. E002/GR-15-826

Exhibit___(JMC-1), Schedule 2

Page 1 of 1

PROXY GROUP SCREENING DATA AND RESULTS - FINAL PROXY GROUP

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11]

Company Dividends

Credit Rating

Between BBB-

and AAA

Covered by

More Than 1

Analyst

Positive

Growth Rates

from at least

two sources

(Value Line,

Yahoo! First

Call, and

Zacks)

Company

Owns

Generation

Assets in Rate

Base

Company-

Owned

Generation >

50% of MWh

Sales to

Ultimate

Customers

% Regulated

Revenue >

60%

% Regulated

Operating

Income > 60%

% Regulated

Electric

Revenue >

80%

% Regulated

Electric

Operating

Income > 80%

Announced

Merger

ALLETE, Inc. ALE YES BBB+ YES YES YES 63% 90% 101% 97% 97% NO

Alliant Energy Corporation LNT YES A- YES YES YES 56% 98% 94% 84% 87% NO

Ameren Corporation AEE YES BBB+ YES YES YES 78% 100% 102% 83% 89% NO

American Electric Power Company, Inc. AEP YES BBB YES YES YES 67% 92% 85% 100% 100% NO

Duke Energy Corporation DUK YES A- YES YES YES 87% 92% 102% 98% 97% NO

El Paso Electric Company EE YES BBB YES YES YES 81% 100% 100% 100% 100% NO

Empire District Electric Company EDE YES BBB YES YES YES 70% 99% 98% 92% 94% NO

Great Plains Energy Inc. GXP YES BBB+ YES YES YES 84% 100% 101% 100% 100% NO

IDACORP, Inc. IDA YES BBB YES YES YES 77% 100% 100% 100% 100% NO

OGE Energy Corporation OGE YES A- YES YES YES 78% 102% 100% 91% 93% NO

Pinnacle West Capital Corporation PNW YES A- YES YES YES 79% 100% 100% 100% 100% NO

PNM Resources, Inc. PNM YES BBB YES YES YES 82% 100% 99% 100% 100% NO

Westar Energy, Inc. WR YES BBB+ YES YES YES 84% 100% 100% 100% 100% NO

Notes:

[1] Source: SNL Financial

[2] Source: SNL Financial

[3] Source: Yahoo! Finance and Zacks

[4] Source: Yahoo! Finance, Value Line Investment Survey, and Zacks

[5] Source: SNL Financial (pulled from FERC Form 1)

[6] Source: SNL Financial (pulled from FERC Form 1) 2012-2014

[7] to [10] Source: 2014 Form 10-Ks, average % for 2014, 2013 & 2012

[11] SNL Financial News Releases



Page 1 of 330-DAY CONSTANT GROWTH DCF

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11]

Company

Annualized

Dividend

Stock

Price

Dividend

Yield

Expected

Dividend

Yield

Value

Line

Earnings

Growth

Yahoo!

Finance

Earnings

Growth

Zacks

Earnings

Growth

Average

Growth

Rate

Mean Low

ROE

Overall

Mean

ROE

Mean High

ROE

ALLETE, Inc. ALE $2.02 $48.42 4.17% 4.30% 6.50% 6.00% N/A 6.25% 10.30% 10.55% 10.81%

Alliant Energy Corporation LNT $2.20 $57.01 3.86% 3.97% 6.00% 5.75% 5.30% 5.68% 9.26% 9.65% 9.97%

Ameren Corporation AEE $1.64 $40.41 4.06% 4.19% 7.00% 6.25% 6.80% 6.68% 10.44% 10.88% 11.20%

American Electric Power Company, Inc. AEP $2.12 $54.87 3.86% 3.96% 5.00% 4.63% 4.90% 4.84% 8.58% 8.80% 8.96%

Duke Energy Corporation DUK $3.30 $70.61 4.67% 4.78% 5.00% 4.33% 4.70% 4.68% 9.11% 9.46% 9.79%

El Paso Electric Company EE $1.18 $35.53 3.32% 3.42% 3.50% 7.00% 6.70% 5.73% 6.88% 9.15% 10.44%

Empire District Electric Company EDE $1.04 $21.78 4.78% 4.86% 3.00% 3.00% 5.00% 3.67% 7.85% 8.53% 9.89%

Great Plains Energy Inc. GXP $0.98 $25.44 3.85% 3.96% 5.00% 6.37% 6.10% 5.82% 8.95% 9.79% 10.34%

IDACORP, Inc. IDA $1.88 $60.60 3.10% 3.15% 1.00% 4.00% 4.00% 3.00% 4.12% 6.15% 7.16%

OGE Energy Corporation OGE $1.00 $27.58 3.63% 3.69% 3.00% 3.34% 5.00% 3.78% 6.68% 7.47% 8.72%

Pinnacle West Capital Corporation PNW $2.38 $61.08 3.90% 3.99% 4.00% 5.37% 5.20% 4.86% 7.97% 8.85% 9.37%

PNM Resources, Inc. PNM $0.80 $26.06 3.07% 3.20% 9.00% 8.56% 8.00% 8.52% 11.19% 11.72% 12.21%

Westar Energy, Inc. WR $1.44 $36.93 3.90% 3.99% 6.00% 3.40% 3.90% 4.43% 7.37% 8.42% 10.02%

Mean 3.86% 3.96% 4.92% 5.23% 5.47% 5.23% 8.36% 9.19% 9.91%

Flotation Cost 0.19% 0.19% 0.19%

Flotation Cost Adjusted DCF Result 8.55% 9.38% 10.11%

Notes:

[1] Source: Bloomberg Professional

[2] Source: Bloomberg Professional, equals 30-day average as of September 30, 2015

[3] Equals [1] / [2]

[4] Equals [3] x (1 + 0.50 x [8])

[5] Source: Value Line

[6] Source: Yahoo! Finance

[7] Source: Zacks

[8] Equals Average ([5], [6], [7])

[9] Equals [3] x (1 + 0.50 x Minimum ([5], [6], [7])) + Minimum ([5], [6], [7])

[10] Equals [4] + [8]

[11] Equals [3] x (1 + 0.50 x Maximum ([5], [6], [7])) + Maximum ([5], [6], [7])




[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11]

Company

Annualized

Dividend

Stock

Price

Dividend

Yield

Expected

Dividend

Yield

Value

Line

Earnings

Growth

Yahoo!

Finance

Earnings

Growth

Zacks

Earnings

Growth

Average

Growth

Rate

Mean Low

ROE

Overall

Mean

ROE

Mean High

ROE

ALLETE, Inc. ALE $2.02 $48.56 4.16% 4.29% 6.50% 6.00% N/A 6.25% 10.28% 10.54% 10.79%








IDACORP, Inc. IDA $1.88 $59.43 3.16% 3.21% 1.00% 4.00% 4.00% 3.00% 4.18% 6.21% 7.23%





Mean 3.83% 3.93% 4.92% 5.23% 5.47% 5.23% 8.33% 9.16% 9.89%

Flotation Costs 0.19% 0.19% 0.19%


Notes:



[3] Equals [1] / [2]

[4] Equals [3] x (1 + 0.50 x [8])



[7] Source: Zacks

[8] Equals Average ([5], [6], [7])


[10] Equals [4] + [8]





[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11]

Company

Annualized

Dividend

Stock

Price

Dividend

Yield

Expected

Dividend

Yield

Value

Line

Earnings

Growth

Yahoo!

Finance

Earnings

Growth

Zacks

Earnings

Growth

Average

Growth

Rate

Mean Low

ROE

Overall

Mean

ROE

Mean High

ROE

ALLETE, Inc. ALE $2.02 $50.81 3.98% 4.10% 6.50% 6.00% N/A 6.25% 10.10% 10.35% 10.61%








IDACORP, Inc. IDA $1.88 $61.13 3.08% 3.12% 1.00% 4.00% 4.00% 3.00% 4.09% 6.12% 7.14%





Mean 3.68% 3.77% 4.92% 5.23% 5.47% 5.23% 8.18% 9.00% 9.73%

Flotation Costs 0.19% 0.19% 0.19%


Notes:



[3] Equals [1] / [2]

[4] Equals [3] x (1 + 0.50 x [8])



[7] Source: Zacks

[8] Equals Average ([5], [6], [7])


[10] Equals [4] + [8]




Page 1 of 2

FLOTATION COST ADJUSTMENT

Flotation Costs from Inception to Date

Date

Shares

Issued Market Price Offering Price

Underwriting

Discount

Offering

Expense Net Proceeds

Total Flotation

Costs

Gross Equity

Issue before

Costs Net Proceeds

Flotation Cost

Percentage

11/16/1949 1,584,238 $10.750 $10.250 $0.124 $0.137 $9.989 $1,205,605 $17,030,559 $15,824,953 7.079%

6/4/1952 1,108,966 $10.500 $10.500 $0.098 $0.162 $10.240 $288,331 $11,644,143 $11,355,812 2.476%

4/14/1954 1,219,856 $15.250 $14.000 $0.060 $0.124 $13.816 $1,749,274 $18,602,804 $16,853,530 9.403%

2/29/1956 670,920 $17.825 $16.750 $0.050 $0.221 $16.479 $903,058 $11,959,149 $11,056,091 7.551%

7/22/1959 952,033 $23.375 $22.000 $0.069 $0.191 $21.740 $1,556,574 $22,253,771 $20,697,197 6.995%

7/28/1965 772,008 $35.250 $33.000 $0.092 $0.225 $32.683 $1,981,745 $27,213,282 $25,231,537 7.282%

1/22/1969 1,080,811 $29.000 $27.000 $0.119 $0.187 $26.694 $2,492,350 $31,343,519 $28,851,169 7.952%

10/21/1970 1,729,298 $23.125 $21.500 $0.175 $0.149 $21.176 $3,370,402 $39,990,016 $36,619,614 8.428%

7/26/1972 1,902,228 $25.000 $23.500 $0.129 $0.166 $23.205 $3,414,499 $47,555,700 $44,141,201 7.180%

10/10/1973 2,092,451 $25.825 $24.500 $0.128 $0.153 $24.219 $3,360,476 $54,037,547 $50,677,071 6.219%

11/20/1974 2,300,000 $17.625 $17.500 $0.910 $0.069 $16.521 $2,539,200 $40,537,500 $37,998,300 6.264%

8/14/1975 1,750,000 $23.000 $23.000 $0.740 $0.077 $22.183 $1,429,750 $40,250,000 $38,820,250 3.552%

6/3/1976 2,000,000 $24.000 $24.000 $0.720 $0.064 $23.216 $1,568,000 $48,000,000 $46,432,000 3.267%

5/31/1993 3,041,955 $44.125 $43.625 $1.200 $0.048 $42.377 $5,317,337 $134,226,264 $128,908,927 3.961%

9/23/1997 4,500,000 $49.938 $49.563 $1.230 $0.133 $48.200 $7,821,000 $224,721,000 $216,900,000 3.480%

9/29/1997 400,000 $50.500 $49.563 $1.230 $0.133 $48.200 $920,000 $20,200,000 $19,280,000 4.554%

2/25/2002 20,000,000 $22.950 $22.500 $0.730 $0.015 $21.755 $23,900,000 $459,000,000 $435,100,000 5.207%

9/9/2008 17,250,000 $20.860 $20.200 $0.100 $0.006 $20.094 $13,218,352 $359,835,000 $346,616,648 3.673%

8/3/2010 21,850,000 $22.100 $21.500 $0.645 $0.013 $20.571 $33,407,927 $482,885,000 $449,477,073 6.918% [1]

March 2013 7,757,449 $29.057 $29.057 $0.291 $0.052 $28.714 $2,657,558 $225,407,642 $222,750,085 1.179%

June 2014 5,693,946 $30.663 $30.663 $0.307 $0.030 $30.326 $1,915,210 $174,592,340 $172,677,130 1.097%

Weighted Average Flotation Costs $115,016,648 $2,491,285,237 $2,376,268,590 4.617%

Source: Company data.

[1] This issuance was structured as a forward equity sale. The spread between the initial forward sale price ( i.e. , $20.855) and the actual forward settle price (i.e. , $20.584) is reflected in the net proceeds.

The flotation adjustment is derived by dividing the dividend yield by 1-F (where F = flotation costs expressed in percentage terms), or by 0.9538, and adding that result to the constant growth rate

to determine the cost of equity. Using the formulas shown previously in my testimony, the Constant Growth DCF calculation is modified as follows to accommodate an adjustment for flotation

costs:

gFP

gDk

)1(

)5.1(



Page 2 of 2

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11]

Stock Price

Annualized

Dividend Dividend Yield

Expected

Dividend

Yield

Expected

Dividend Yield

Adjusted for

Flotation Costs

Value Line

Earnings

Growth

Yahoo!

Finance

Earnings

Growth

Zacks Earnings

Growth

Average Growth

Estimate DCF k(e)

Flotation

Adjusted DCF

k(e)

ALLETE, Inc. ALE $48.42 $2.02 4.17% 4.30% 4.51% 6.50% 6.00% N/A 6.25% 10.55% 10.76%








IDACORP, Inc. IDA $60.60 $1.88 3.10% 3.15% 3.30% 1.00% 4.00% 4.00% 3.00% 6.15% 6.30%





PROXY GROUP MEAN 3.86% 3.96% 4.15% 4.92% 5.23% 5.47% 5.23% 9.19% 9.38%

MEAN 9.38%

UNADJUSTED CONSTANT GROWTH DCF MEAN 9.19%

DIFFERENCE (FLOTATION COST ADJUSTMENT) [12] 0.19%



[3] Equals [1] / [2]

[4] Equals [3] x (1 + 0.50 x [9])

[5] Equals [4] /(1- [Flotation Cost Percentage])



[8] Source: Zacks

[9] Equals average ([6], [7], [8])

[10] Equals [4] + [9]

[11] Equals [5] + [9]

[12] Equals [11] - [10]

FLOTATION COST ADJUSTMENT



Page 1 of 1

CALCULATION OF LONG-TERM GDP GROWTH RATE

FORECASTED GDP GROWTH

Using CPI Consensus Forecast (High)

CPI (2022-2026) [1] 2.30%

Real GDP Growth (2022-2026) [1] 2.30%

Nominal GDP Growth 4.65%

Using Current TIPS Spread (Low)

Inflation [2] 1.72%

Real GDP Growth (2022-2026) [1] 2.30%


Average Nominal GDP Growth 4.36%

HISTORICAL GDP GROWTH

Using CPI Consensus Forecast (High)

CPI (2022-2026) [1] 2.30%

Real GDP Growth (1929-2014) [3] 3.25%


Using Current TIPS Spread (Low)

Inflation [2] 1.72%

Real GDP Growth (1929-2014) [3] 3.25%


Average Nominal GDP Growth 5.32%

Notes:

[1] Blue Chip Financial Forecasts, Vol. 34, No. 6, June 1, 2015, at 14

[2] Equals 30-day average of 30-year Treasury Bond yield less the 30-day average

of 30-year TIPS yield as of September 30, 2015

[3] Bureau of Economic Analysis, September 25, 2015


Exhibit___(JMC-1), Schedule 6.1

Page 1 of 3

30-DAY MULTI-STAGE DCF -- MEAN GROWTH RATE -- FORECASTED GDP GROWTH

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]

Second Stage Growth First Stage

Stock Annualized First Stage Third Stage

Company Ticker Price Dividend Growth Year 6 Year 7 Year 8 Year 9 Year 10 Growth ROE

ALLETE, Inc. ALE $48.42 $2.02 6.25% 5.93% 5.62% 5.30% 4.99% 4.67% 4.36% 9.46%

Alliant Energy Corporation LNT $57.01 $2.20 5.68% 5.46% 5.24% 5.02% 4.80% 4.58% 4.36% 8.91%

Ameren Corporation AEE $40.41 $1.64 6.68% 6.30% 5.91% 5.52% 5.13% 4.74% 4.36% 9.46%

American Electric Power Company, Inc. AEP $54.87 $2.12 4.84% 4.76% 4.68% 4.60% 4.52% 4.44% 4.36% 8.68%

Duke Energy Corporation DUK $70.61 $3.30 4.68% 4.62% 4.57% 4.52% 4.46% 4.41% 4.36% 9.56%

El Paso Electric Company EE $35.53 $1.18 5.73% 5.50% 5.27% 5.04% 4.82% 4.59% 4.36% 8.28%

Empire District Electric Company EDE $21.78 $1.04 3.67% 3.78% 3.90% 4.01% 4.13% 4.24% 4.36% 9.34%

Great Plains Energy Inc. GXP $25.44 $0.98 5.82% 5.58% 5.33% 5.09% 4.85% 4.60% 4.36% 8.95%

IDACORP, Inc. IDA $60.60 $1.88 3.00% 3.23% 3.45% 3.68% 3.90% 4.13% 4.36% 7.41%

OGE Energy Corporation OGE $27.58 $1.00 3.78% 3.88% 3.97% 4.07% 4.16% 4.26% 4.36% 8.14%

Pinnacle West Capital Corporation PNW $61.08 $2.38 4.86% 4.77% 4.69% 4.61% 4.52% 4.44% 4.36% 8.72%

PNM Resources, Inc. PNM $26.06 $0.80 8.52% 7.83% 7.13% 6.44% 5.74% 5.05% 4.36% 8.68%

Westar Energy, Inc. WR $36.93 $1.44 4.43% 4.42% 4.41% 4.39% 4.38% 4.37% 4.36% 8.61%

Mean 8.79%

Flotation Cost 0.19%

Flotation Cost Adjusted DCF Result 8.98%

Notes:



[3] Source: Schedule 3, col. [8]

[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6

[9] Source: Schedule 5, mean estimate

[10] Equals internal rate of return of cash flows for Year 0 through Year 200



Page 2 of 3


[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $48.56 $2.02 6.25% 5.93% 5.62% 5.30% 4.99% 4.67% 4.36% 9.45%








IDACORP, Inc. IDA $59.43 $1.88 3.00% 3.23% 3.45% 3.68% 3.90% 4.13% 4.36% 7.48%





Mean 8.76%



Notes:




[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6





Page 3 of 3


[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $50.81 $2.02 6.25% 5.93% 5.62% 5.30% 4.99% 4.67% 4.36% 9.22%








IDACORP, Inc. IDA $61.13 $1.88 3.00% 3.23% 3.45% 3.68% 3.90% 4.13% 4.36% 7.38%





Mean 8.58%



Notes:




[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6





Page 1 of 3

30-DAY MULTI-STAGE DCF -- LOW GROWTH RATE -- FORECASTED GDP GROWTH

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $48.42 $2.02 6.00% 5.68% 5.35% 5.03% 4.71% 4.38% 4.06% 9.16%








IDACORP, Inc. IDA $60.60 $1.88 1.00% 1.51% 2.02% 2.53% 3.04% 3.55% 4.06% 6.76%





Mean 8.34%



Notes:



[3] Source: Schedule 3, minimum ([5], [6], [7])

[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6

[9] Source: Schedule 5, low estimate




Page 2 of 3


[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $48.56 $2.02 6.00% 5.68% 5.35% 5.03% 4.71% 4.38% 4.06% 9.15%








IDACORP, Inc. IDA $59.43 $1.88 1.00% 1.51% 2.02% 2.53% 3.04% 3.55% 4.06% 6.82%





Mean 8.32%



Notes:




[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6





Page 3 of 3


[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $50.81 $2.02 6.00% 5.68% 5.35% 5.03% 4.71% 4.38% 4.06% 8.92%








IDACORP, Inc. IDA $61.13 $1.88 1.00% 1.51% 2.02% 2.53% 3.04% 3.55% 4.06% 6.73%





Mean 8.14%



Notes:




[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6





Page 1 of 3

30-DAY MULTI-STAGE DCF -- HIGH GROWTH RATE -- FORECASTED GDP GROWTH

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $48.42 $2.02 6.50% 6.19% 5.88% 5.58% 5.27% 4.96% 4.65% 9.77%








IDACORP, Inc. IDA $60.60 $1.88 4.00% 4.11% 4.22% 4.33% 4.44% 4.54% 4.65% 7.87%





Mean 9.21%



Notes:



[3] Source: Schedule 3, maximum ([5], [6], [7])

[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6

[9] Source: Schedule 5, high estimate




Page 2 of 3


[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $48.56 $2.02 6.50% 6.19% 5.88% 5.58% 5.27% 4.96% 4.65% 9.75%








IDACORP, Inc. IDA $59.43 $1.88 4.00% 4.11% 4.22% 4.33% 4.44% 4.54% 4.65% 7.94%





Mean 9.19%



Notes:




[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6





Page 3 of 3


[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $50.81 $2.02 6.50% 6.19% 5.88% 5.58% 5.27% 4.96% 4.65% 9.52%








IDACORP, Inc. IDA $61.13 $1.88 4.00% 4.11% 4.22% 4.33% 4.44% 4.54% 4.65% 7.84%





Mean 9.00%



Notes:




[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6





Page 1 of 3

30-DAY MULTI-STAGE DCF -- MEAN GROWTH RATE -- HISTORICAL GDP GROWTH

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $48.42 $2.02 6.25% 6.10% 5.94% 5.79% 5.63% 5.48% 5.32% 10.20%








IDACORP, Inc. IDA $60.60 $1.88 3.00% 3.39% 3.77% 4.16% 4.55% 4.93% 5.32% 8.22%





Mean 9.54%



Notes:




[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6





Page 2 of 3


[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $48.56 $2.02 6.25% 6.10% 5.94% 5.79% 5.63% 5.48% 5.32% 10.18%








IDACORP, Inc. IDA $59.43 $1.88 3.00% 3.39% 3.77% 4.16% 4.55% 4.93% 5.32% 8.28%





Mean 9.52%



Notes:




[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6





Page 3 of 3


[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $50.81 $2.02 6.25% 6.10% 5.94% 5.79% 5.63% 5.48% 5.32% 9.96%








IDACORP, Inc. IDA $61.13 $1.88 3.00% 3.39% 3.77% 4.16% 4.55% 4.93% 5.32% 8.20%





Mean 9.34%



Notes:




[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6





Page 1 of 3

30-DAY MULTI-STAGE DCF -- LOW GROWTH RATE -- HISTORICAL GDP GROWTH

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $48.42 $2.02 6.00% 5.84% 5.67% 5.51% 5.35% 5.18% 5.02% 9.89%








IDACORP, Inc. IDA $60.60 $1.88 1.00% 1.67% 2.34% 3.01% 3.68% 4.35% 5.02% 7.58%





Mean 9.10%



Notes:




[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6





Page 2 of 3


[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $48.56 $2.02 6.00% 5.84% 5.67% 5.51% 5.35% 5.18% 5.02% 9.88%








IDACORP, Inc. IDA $59.43 $1.88 1.00% 1.67% 2.34% 3.01% 3.68% 4.35% 5.02% 7.64%





Mean 9.08%



Notes:




[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6





Page 3 of 3


[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $50.81 $2.02 6.00% 5.84% 5.67% 5.51% 5.35% 5.18% 5.02% 9.66%








IDACORP, Inc. IDA $61.13 $1.88 1.00% 1.67% 2.34% 3.01% 3.68% 4.35% 5.02% 7.56%





Mean 8.91%



Notes:




[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6





Page 1 of 3

30-DAY MULTI-STAGE DCF -- HIGH GROWTH RATE -- HISTORICAL GDP GROWTH

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $48.42 $2.02 6.50% 6.35% 6.21% 6.06% 5.91% 5.77% 5.62% 10.50%








IDACORP, Inc. IDA $60.60 $1.88 4.00% 4.27% 4.54% 4.81% 5.08% 5.35% 5.62% 8.68%





Mean 9.97%



Notes:




[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6





Page 2 of 3


[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $48.56 $2.02 6.50% 6.35% 6.21% 6.06% 5.91% 5.77% 5.62% 10.49%








IDACORP, Inc. IDA $59.43 $1.88 4.00% 4.27% 4.54% 4.81% 5.08% 5.35% 5.62% 8.74%





Mean 9.94%



Notes:




[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6





Page 3 of 3


[1] [2] [3] [4] [5] [6] [7] [8] [9] [10]




ALLETE, Inc. ALE $50.81 $2.02 6.50% 6.35% 6.21% 6.06% 5.91% 5.77% 5.62% 10.27%








IDACORP, Inc. IDA $61.13 $1.88 4.00% 4.27% 4.54% 4.81% 5.08% 5.35% 5.62% 8.65%





Mean 9.76%



Notes:




[4] Equals [3] + ([9] − [3]) / 6

[5] Equals [4] + ([9] − [3]) / 6

[6] Equals [5] + ([9] − [3]) / 6

[7] Equals [6] + ([9] − [3]) / 6

[8] Equals [7] + ([9] − [3]) / 6





Page 1 of 1

BETA

AS OF SEPTEMBER 30, 2015

[1] [2]

Bloomberg Value Line

ALLETE, Inc. ALE 0.63 0.80

Alliant Energy Corporation LNT 0.71 0.80

Ameren Corporation AEE 0.67 0.75

American Electric Power Company, Inc. AEP 0.63 0.70

Duke Energy Corporation DUK 0.44 0.60

El Paso Electric Company EE 0.74 0.75

Empire District Electric Company EDE 0.60 0.70

Great Plains Energy Inc. GXP 0.68 0.85

IDACORP, Inc. IDA 0.72 0.80

OGE Energy Corporation OGE 0.75 0.90

Pinnacle West Capital Corporation PNW 0.65 0.70

PNM Resources, Inc. PNM 0.71 0.85

Westar Energy, Inc. WR 0.66 0.75

Average 0.661 0.765

Notes:


[2] Source: Value Line; dated July 31, 2015, August 21, 2015, and September 18 2015.



Page 1 of 7

MARKET RISK PREMIUM DERIVED FROM ANALYSTS LONG-TERM GROWTH ESTIMATES

[1] Estimated Weighted Average Dividend Yield 2.30%

[2] Estimated Weighted Average Long-Term Growth Rate 10.98%

[3] S&P 500 Estimated Required Market Return 13.40%

[4] Risk-Free Rate 2.92% 3.40% 4.80%

[5] Implied Market Risk Premium 10.48% 10.00% 8.60%

STANDARD AND POOR'S 500 INDEX

[6] [7] [8] [9] [10]

Name Ticker Weight In Index

Estimated

Dividend Yield

Cap-Weighted

Dividend Yield

Long-Term

Growth Estimate

Cap. Weighted

Long-Term

Growth

Alcoa Inc AA 0.07% 1.24% 0.00% 12.30% 0.01%

LyondellBasell Industries NV LYB 0.22% 3.74% 0.01% 6.25% 0.01%

American Express Co AXP 0.42% 1.56% 0.01% 9.62% 0.04%

Verizon Communications Inc VZ 1.01% 5.19% 0.05% 7.42% 0.07%

Avago Technologies Ltd AVGO 0.20% 1.34% 0.00% 21.18% 0.04%

Boeing Co/The BA 0.51% 2.78% 0.01% 11.28% 0.06%

Caterpillar Inc CAT 0.22% 4.71% 0.01% 9.00% 0.02%

JPMorgan Chase & Co JPM 1.29% 2.89% 0.04% 6.90% 0.09%

Chevron Corp CVX 0.85% 5.43% 0.05% -2.02% -0.02%

Coca-Cola Co/The KO 0.99% 3.29% 0.03% 6.40% 0.06%

AbbVie Inc ABBV 0.51% 3.75% 0.02% 8.65% 0.04%

Walt Disney Co/The DIS 0.98% 1.29% 0.01% 11.90% 0.12%

EI du Pont de Nemours & Co DD 0.25% 3.15% 0.01% 4.80% 0.01%

Exxon Mobil Corp XOM 1.77% 3.93% 0.07% -1.92% -0.03%

Phillips 66 PSX 0.24% 2.92% 0.01% 5.32% 0.01%

General Electric Co GE 1.45% 3.65% 0.05% 7.92% 0.11%

Hewlett-Packard Co HPQ 0.26% 2.75% 0.01% 4.05% 0.01%

Home Depot Inc/The HD 0.85% 2.04% 0.02% 13.78% 0.12%

International Business Machines Corp IBM 0.81% 3.59% 0.03% 6.58% 0.05%

Johnson & Johnson JNJ 1.47% 3.21% 0.05% 5.97% 0.09%

McDonald's Corp MCD 0.53% 3.45% 0.02% 7.89% 0.04%

Merck & Co Inc MRK 0.79% 3.64% 0.03% 6.07% 0.05%

3M Co MMM 0.50% 2.89% 0.01% 9.12% 0.05%

Bank of America Corp BAC 0.93% 1.28% 0.01% 8.83% 0.08%

Pfizer Inc PFE 1.10% 3.57% 0.04% 1.73% 0.02%

Procter & Gamble Co/The PG 1.11% 3.69% 0.04% 7.22% 0.08%

AT&T Inc T 1.14% 5.77% 0.07% 3.72% 0.04%

Travelers Cos Inc/The TRV 0.18% 2.45% 0.00% 8.62% 0.02%

United Technologies Corp UTX 0.45% 2.88% 0.01% 8.71% 0.04%

Analog Devices Inc ADI 0.10% 2.84% 0.00% 11.38% 0.01%

Wal-Mart Stores Inc WMT 1.18% 3.02% 0.04% 5.91% 0.07%

Cisco Systems Inc CSCO 0.76% 3.20% 0.02% 8.77% 0.07%

Intel Corp INTC 0.82% 3.19% 0.03% 9.17% 0.07%

General Motors Co GM 0.27% 4.80% 0.01% 11.86% 0.03%

Microsoft Corp MSFT 2.02% 3.25% 0.07% 10.96% 0.22%

Dollar General Corp DG 0.12% 1.21% 0.00% 11.82% 0.01%

Kinder Morgan Inc/DE KMI 0.35% 7.08% 0.02% 9.33% 0.03%

Citigroup Inc C 0.85% 0.40% 0.00% 28.87% 0.25%

American International Group Inc AIG 0.42% 1.97% 0.01% 9.04% 0.04%

Honeywell International Inc HON 0.42% 2.19% 0.01% 9.51% 0.04%

Altria Group Inc MO 0.61% 4.15% 0.03% 7.45% 0.05%

HCA Holdings Inc HCA 0.18% n/a n/a 10.96% 0.02%

Under Armour Inc UA 0.10% n/a n/a 22.55% 0.02%

International Paper Co IP 0.09% 4.23% 0.00% 8.28% 0.01%

Abbott Laboratories ABT 0.34% 2.39% 0.01% 12.28% 0.04%

Aflac Inc AFL 0.14% 2.68% 0.00% 8.79% 0.01%

Air Products & Chemicals Inc APD 0.16% 2.54% 0.00% 9.10% 0.01%

Airgas Inc ARG 0.04% 2.69% 0.00% 8.83% 0.00%

Royal Caribbean Cruises Ltd RCL 0.11% 1.68% 0.00% 20.54% 0.02%

American Electric Power Co Inc AEP 0.16% 3.73% 0.01% 5.36% 0.01%

Hess Corp HES 0.08% 2.00% 0.00% -8.60% -0.01%

Anadarko Petroleum Corp APC 0.17% 1.79% 0.00% 8.33% 0.01%

Aon PLC AON 0.14% 1.35% 0.00% 11.04% 0.02%

Apache Corp APA 0.08% 2.55% 0.00% -2.44% 0.00%

Archer-Daniels-Midland Co ADM 0.14% 2.70% 0.00% 3.65% 0.01%

AGL Resources Inc GAS 0.04% 3.34% 0.00% 6.50% 0.00%

Automatic Data Processing Inc ADP 0.21% 2.44% 0.01% 10.40% 0.02%

AutoZone Inc AZO 0.13% n/a n/a 12.57% 0.02%

Avery Dennison Corp AVY 0.03% 2.62% 0.00% 7.35% 0.00%

Baker Hughes Inc BHI 0.13% 1.31% 0.00% 8.15% 0.01%

Ball Corp BLL 0.05% 0.84% 0.00% 9.07% 0.00%

Bank of New York Mellon Corp/The BK 0.25% 1.74% 0.00% 12.10% 0.03%

CR Bard Inc BCR 0.08% 0.52% 0.00% 10.00% 0.01%

Baxter International Inc BAX 0.10% 1.40% 0.00% 10.67% 0.01%

Becton Dickinson and Co BDX 0.16% 1.81% 0.00% 11.25% 0.02%

Berkshire Hathaway Inc BRK/B 0.93% n/a n/a 5.80% 0.05%

Best Buy Co Inc BBY 0.07% 2.48% 0.00% 10.47% 0.01%

H&R Block Inc HRB 0.06% 2.21% 0.00% 11.00% 0.01%



Page 2 of 7


[6] [7] [8] [9] [10]


Estimated

Dividend Yield

Cap-Weighted

Dividend Yield

Long-Term

Growth Estimate

Cap. Weighted

Long-Term

Growth

Boston Scientific Corp BSX 0.13% n/a n/a 9.72% 0.01%

Bristol-Myers Squibb Co BMY 0.56% 2.50% 0.01% 13.58% 0.08%

Brown-Forman Corp BF/B 0.07% 1.30% 0.00% 8.80% 0.01%

Cabot Oil & Gas Corp COG 0.05% 0.37% 0.00% 43.48% 0.02%

Campbell Soup Co CPB 0.09% 2.46% 0.00% 4.75% 0.00%

Kansas City Southern KSU 0.06% 1.45% 0.00% 11.45% 0.01%

Carnival Corp CCL 0.17% 2.41% 0.00% 17.74% 0.03%

Qorvo Inc QRVO 0.04% n/a n/a 16.84% 0.01%

CenturyLink Inc CTL 0.08% 8.60% 0.01% -1.29% 0.00%

Chubb Corp/The CB 0.16% 1.86% 0.00% 9.75% 0.02%

Cigna Corp CI 0.20% 0.03% 0.00% 11.36% 0.02%

Frontier Communications Corp FTR 0.03% 8.84% 0.00% 3.00% 0.00%

Clorox Co/The CLX 0.09% 2.67% 0.00% 6.77% 0.01%

CMS Energy Corp CMS 0.06% 3.28% 0.00% 6.28% 0.00%

Coca-Cola Enterprises Inc CCE 0.06% 2.32% 0.00% 6.19% 0.00%

Colgate-Palmolive Co CL 0.33% 2.40% 0.01% 8.20% 0.03%

Comerica Inc CMA 0.04% 2.04% 0.00% 9.85% 0.00%

CA Inc CA 0.07% 3.66% 0.00% 5.70% 0.00%

Computer Sciences Corp CSC 0.05% 1.50% 0.00% 9.30% 0.00%

ConAgra Foods Inc CAG 0.10% 2.47% 0.00% 8.00% 0.01%

Consolidated Edison Inc ED 0.11% 3.89% 0.00% 2.80% 0.00%

SL Green Realty Corp SLG 0.06% 2.22% 0.00% 5.78% 0.00%

Corning Inc GLW 0.12% 2.80% 0.00% 4.19% 0.01%

CSX Corp CSX 0.15% 2.68% 0.00% 9.44% 0.01%

Cummins Inc CMI 0.11% 3.59% 0.00% 9.99% 0.01%

Danaher Corp DHR 0.33% 0.63% 0.00% 11.98% 0.04%

Target Corp TGT 0.28% 2.85% 0.01% 9.65% 0.03%

Deere & Co DE 0.14% 3.24% 0.00% 4.92% 0.01%

Dominion Resources Inc/VA D 0.24% 3.68% 0.01% 6.23% 0.01%

Dover Corp DOV 0.05% 2.94% 0.00% 12.00% 0.01%

Dow Chemical Co/The DOW 0.28% 3.96% 0.01% 6.95% 0.02%

Duke Energy Corp DUK 0.28% 4.59% 0.01% 4.70% 0.01%

Eaton Corp PLC ETN 0.14% 4.29% 0.01% 8.51% 0.01%

Ecolab Inc ECL 0.18% 1.20% 0.00% 13.33% 0.02%

PerkinElmer Inc PKI 0.03% 0.61% 0.00% 8.54% 0.00%

EMC Corp/MA EMC 0.27% 1.90% 0.01% 11.38% 0.03%

Emerson Electric Co EMR 0.17% 4.26% 0.01% 5.00% 0.01%

EOG Resources Inc EOG 0.23% 0.92% 0.00% -4.46% -0.01%

Entergy Corp ETR 0.07% 5.10% 0.00% 1.00% 0.00%

Equifax Inc EFX 0.07% 1.19% 0.00% 12.67% 0.01%

EQT Corp EQT 0.06% 0.19% 0.00% 25.00% 0.01%

XL Group PLC XL 0.06% 2.20% 0.00% 9.50% 0.01%

FedEx Corp FDX 0.23% 0.69% 0.00% 14.03% 0.03%

Macy's Inc M 0.10% 2.81% 0.00% 8.08% 0.01%

FMC Corp FMC 0.03% 1.95% 0.00% 7.17% 0.00%

Ford Motor Co F 0.30% 4.42% 0.01% 15.58% 0.05%

NextEra Energy Inc NEE 0.26% 3.16% 0.01% 7.00% 0.02%

Franklin Resources Inc BEN 0.13% 1.61% 0.00% 8.81% 0.01%

Freeport-McMoRan Inc FCX 0.06% 2.06% 0.00% -15.05% -0.01%

TEGNA Inc TGNA 0.03% 2.50% 0.00% 2.10% 0.00%

Gap Inc/The GPS 0.07% 3.23% 0.00% 9.58% 0.01%

General Dynamics Corp GD 0.25% 2.00% 0.01% 9.39% 0.02%

General Mills Inc GIS 0.19% 3.14% 0.01% 7.38% 0.01%

Genuine Parts Co GPC 0.07% 2.97% 0.00% 9.17% 0.01%

WW Grainger Inc GWW 0.08% 2.18% 0.00% 11.90% 0.01%

Halliburton Co HAL 0.17% 2.04% 0.00% 11.92% 0.02%

Harley-Davidson Inc HOG 0.06% 2.26% 0.00% 10.83% 0.01%

Harman International Industries Inc HAR 0.04% 1.46% 0.00% 17.00% 0.01%

Joy Global Inc JOY 0.01% 5.36% 0.00% 14.50% 0.00%

Harris Corp HRS 0.05% 2.73% 0.00% n/a n/a

HCP Inc HCP 0.10% 6.07% 0.01% 2.91% 0.00%

Helmerich & Payne Inc HP 0.03% 5.82% 0.00% 5.35% 0.00%

Hershey Co/The HSY 0.08% 2.54% 0.00% 8.20% 0.01%

Hormel Foods Corp HRL 0.10% 1.58% 0.00% 6.00% 0.01%

Starwood Hotels & Resorts Worldwide Inc HOT 0.06% 2.26% 0.00% 9.55% 0.01%

Mondelez International Inc MDLZ 0.38% 1.62% 0.01% 11.09% 0.04%

CenterPoint Energy Inc CNP 0.04% 5.49% 0.00% 5.00% 0.00%

Humana Inc HUM 0.15% 0.65% 0.00% 12.55% 0.02%

Illinois Tool Works Inc ITW 0.17% 2.67% 0.00% 9.35% 0.02%

Ingersoll-Rand PLC IR 0.08% 2.28% 0.00% 10.22% 0.01%

Interpublic Group of Cos Inc/The IPG 0.04% 2.51% 0.00% 4.00% 0.00%

International Flavors & Fragrances Inc IFF 0.05% 2.17% 0.00% 9.20% 0.00%

Jacobs Engineering Group Inc JEC 0.03% n/a n/a 8.42% 0.00%

Johnson Controls Inc JCI 0.15% 2.51% 0.00% 10.50% 0.02%

Hanesbrands Inc HBI 0.07% 1.38% 0.00% 11.25% 0.01%

Kellogg Co K 0.13% 3.01% 0.00% 6.30% 0.01%

Perrigo Co PLC PRGO 0.13% 0.32% 0.00% 12.29% 0.02%

Kimberly-Clark Corp KMB 0.23% 3.23% 0.01% 7.53% 0.02%

Kimco Realty Corp KIM 0.06% 3.93% 0.00% 4.68% 0.00%

Kohl's Corp KSS 0.05% 3.89% 0.00% 7.90% 0.00%

Oracle Corp ORCL 0.88% 1.66% 0.01% 8.50% 0.07%

Kroger Co/The KR 0.20% 1.16% 0.00% 10.14% 0.02%



Page 3 of 7


[6] [7] [8] [9] [10]


Estimated

Dividend Yield

Cap-Weighted

Dividend Yield

Long-Term

Growth Estimate

Cap. Weighted

Long-Term

Growth

Legg Mason Inc LM 0.03% 1.92% 0.00% 15.50% 0.00%

Leggett & Platt Inc LEG 0.03% 3.10% 0.00% n/a n/a

Lennar Corp LEN 0.05% 0.33% 0.00% 20.20% 0.01%

Leucadia National Corp LUK 0.04% 1.23% 0.00% n/a n/a

Eli Lilly & Co LLY 0.53% 2.39% 0.01% 11.70% 0.06%

L Brands Inc LB 0.15% 2.22% 0.00% 11.06% 0.02%

Lincoln National Corp LNC 0.07% 1.69% 0.00% 10.06% 0.01%

Loews Corp L 0.07% 0.69% 0.00% n/a n/a

Lowe's Cos Inc LOW 0.36% 1.63% 0.01% 16.67% 0.06%

Host Hotels & Resorts Inc HST 0.07% 5.06% 0.00% 5.00% 0.00%

Marsh & McLennan Cos Inc MMC 0.16% 2.37% 0.00% 11.53% 0.02%

Masco Corp MAS 0.05% 1.51% 0.00% 14.79% 0.01%

Mattel Inc MAT 0.04% 7.22% 0.00% 9.65% 0.00%

McGraw Hill Financial Inc MHFI 0.13% 1.53% 0.00% 11.83% 0.02%

Medtronic PLC MDT 0.54% 2.27% 0.01% 6.90% 0.04%

CVS Health Corp CVS 0.61% 1.45% 0.01% 15.37% 0.09%

Micron Technology Inc MU 0.09% n/a n/a 8.44% 0.01%

Motorola Solutions Inc MSI 0.07% 1.99% 0.00% 9.05% 0.01%

Murphy Oil Corp MUR 0.02% 5.79% 0.00% 13.00% 0.00%

Mylan NV MYL 0.11% n/a n/a 11.20% 0.01%

Laboratory Corp of America Holdings LH 0.06% n/a n/a 10.27% 0.01%

Tenet Healthcare Corp THC 0.02% n/a n/a 12.33% 0.00%

Newell Rubbermaid Inc NWL 0.06% 1.91% 0.00% 9.43% 0.01%

Newmont Mining Corp NEM 0.05% 0.62% 0.00% 4.10% 0.00%

Twenty-First Century Fox Inc FOXA 0.18% 1.11% 0.00% 15.58% 0.03%

NIKE Inc NKE 0.48% 0.91% 0.00% 11.39% 0.05%

NiSource Inc NI 0.03% 3.34% 0.00% -0.30% 0.00%

Noble Energy Inc NBL 0.07% 2.39% 0.00% 3.53% 0.00%

Norfolk Southern Corp NSC 0.13% 3.09% 0.00% 9.30% 0.01%

Eversource Energy ES 0.09% 3.30% 0.00% 6.67% 0.01%

Northrop Grumman Corp NOC 0.18% 1.93% 0.00% 6.57% 0.01%

Wells Fargo & Co WFC 1.50% 2.92% 0.04% 11.71% 0.18%

Nucor Corp NUE 0.07% 3.97% 0.00% 12.93% 0.01%

PVH Corp PVH 0.05% 0.15% 0.00% 9.76% 0.00%

Occidental Petroleum Corp OXY 0.29% 4.54% 0.01% 8.00% 0.02%

Omnicom Group Inc OMC 0.09% 3.03% 0.00% 5.33% 0.00%

ONEOK Inc OKE 0.04% 7.52% 0.00% 9.63% 0.00%

Owens-Illinois Inc OI 0.02% n/a n/a 3.60% 0.00%

PG&E Corp PCG 0.15% 3.45% 0.01% 4.25% 0.01%

Parker-Hannifin Corp PH 0.08% 2.59% 0.00% 8.95% 0.01%

PPL Corp PPL 0.13% 4.59% 0.01% 2.04% 0.00%

PepsiCo Inc PEP 0.79% 2.98% 0.02% 5.83% 0.05%

Exelon Corp EXC 0.15% 4.18% 0.01% 5.61% 0.01%

ConocoPhillips COP 0.34% 6.17% 0.02% 0.13% 0.00%

PulteGroup Inc PHM 0.04% 1.70% 0.00% 14.14% 0.01%

Pinnacle West Capital Corp PNW 0.04% 3.71% 0.00% 5.53% 0.00%

Pitney Bowes Inc PBI 0.02% 3.78% 0.00% 14.00% 0.00%

Plum Creek Timber Co Inc PCL 0.04% 4.45% 0.00% 22.85% 0.01%

PNC Financial Services Group Inc/The PNC 0.26% 2.29% 0.01% 7.80% 0.02%

PPG Industries Inc PPG 0.14% 1.64% 0.00% 7.10% 0.01%

Praxair Inc PX 0.17% 2.81% 0.00% 9.00% 0.01%

Precision Castparts Corp PCP 0.18% 0.05% 0.00% 10.55% 0.02%

Progressive Corp/The PGR 0.10% 2.24% 0.00% 7.92% 0.01%

Public Service Enterprise Group Inc PEG 0.12% 3.70% 0.00% 4.83% 0.01%

Raytheon Co RTN 0.19% 2.45% 0.00% 8.35% 0.02%

Robert Half International Inc RHI 0.04% 1.56% 0.00% 14.10% 0.01%

Ryder System Inc R 0.02% 2.22% 0.00% 12.75% 0.00%

SCANA Corp SCG 0.05% 3.87% 0.00% 6.00% 0.00%

Edison International EIX 0.12% 2.65% 0.00% 3.64% 0.00%

Schlumberger Ltd SLB 0.50% 2.90% 0.01% 12.60% 0.06%

Charles Schwab Corp/The SCHW 0.21% 0.84% 0.00% 21.02% 0.05%

Sherwin-Williams Co/The SHW 0.12% 1.20% 0.00% 18.65% 0.02%

JM Smucker Co/The SJM 0.08% 2.35% 0.00% 8.83% 0.01%

Snap-on Inc SNA 0.05% 1.40% 0.00% 3.40% 0.00%

AMETEK Inc AME 0.07% 0.69% 0.00% 10.84% 0.01%

Southern Co/The SO 0.23% 4.85% 0.01% 4.11% 0.01%

BB&T Corp BBT 0.16% 3.03% 0.00% 8.37% 0.01%

Southwest Airlines Co LUV 0.14% 0.79% 0.00% 16.76% 0.02%

Southwestern Energy Co SWN 0.03% n/a n/a 13.40% 0.00%

Stanley Black & Decker Inc SWK 0.08% 2.27% 0.00% 10.67% 0.01%

Public Storage PSA 0.21% 3.21% 0.01% 4.70% 0.01%

SunTrust Banks Inc STI 0.11% 2.51% 0.00% 6.12% 0.01%

Sysco Corp SYY 0.13% 3.08% 0.00% 8.67% 0.01%

TECO Energy Inc TE 0.04% 3.43% 0.00% 5.33% 0.00%

Tesoro Corp TSO 0.07% 2.06% 0.00% 16.14% 0.01%

Texas Instruments Inc TXN 0.29% 3.07% 0.01% 9.23% 0.03%

Textron Inc TXT 0.06% 0.21% 0.00% 9.26% 0.01%

Thermo Fisher Scientific Inc TMO 0.28% 0.49% 0.00% 11.30% 0.03%

Tiffany & Co TIF 0.06% 2.07% 0.00% 11.25% 0.01%

TJX Cos Inc/The TJX 0.27% 1.18% 0.00% 11.19% 0.03%

Torchmark Corp TMK 0.04% 0.96% 0.00% 7.91% 0.00%

Total System Services Inc TSS 0.05% 0.88% 0.00% 11.75% 0.01%



Page 4 of 7


[6] [7] [8] [9] [10]


Estimated

Dividend Yield

Cap-Weighted

Dividend Yield

Long-Term

Growth Estimate

Cap. Weighted

Long-Term

Growth

Tyco International Plc TYC 0.08% 2.45% 0.00% 10.70% 0.01%

Union Pacific Corp UNP 0.44% 2.49% 0.01% 8.90% 0.04%

UnitedHealth Group Inc UNH 0.63% 1.72% 0.01% 12.53% 0.08%

Unum Group UNM 0.05% 2.31% 0.00% 8.50% 0.00%

Marathon Oil Corp MRO 0.06% 5.45% 0.00% -19.05% -0.01%

Varian Medical Systems Inc VAR 0.04% n/a n/a 12.75% 0.01%

Ventas Inc VTR 0.11% 5.21% 0.01% 2.89% 0.00%

VF Corp VFC 0.17% 1.88% 0.00% 12.12% 0.02%

Vornado Realty Trust VNO 0.10% 2.79% 0.00% 3.62% 0.00%

ADT Corp/The ADT 0.03% 2.81% 0.00% 6.33% 0.00%

Vulcan Materials Co VMC 0.07% 0.45% 0.00% 43.59% 0.03%

Weyerhaeuser Co WY 0.08% 4.54% 0.00% 3.50% 0.00%

Whirlpool Corp WHR 0.07% 2.44% 0.00% 16.65% 0.01%

Williams Cos Inc/The WMB 0.16% 6.95% 0.01% 3.75% 0.01%

WEC Energy Group Inc WEC 0.09% 1.79% 0.00% 4.57% 0.00%

Xerox Corp XRX 0.06% 2.88% 0.00% 9.00% 0.01%

Adobe Systems Inc ADBE 0.23% n/a n/a 14.20% 0.03%

AES Corp/VA AES 0.04% 4.09% 0.00% 2.74% 0.00%

Amgen Inc AMGN 0.60% 2.28% 0.01% 8.63% 0.05%

Apple Inc AAPL 3.59% 1.89% 0.07% 16.98% 0.61%

Autodesk Inc ADSK 0.06% n/a n/a 16.15% 0.01%

Cintas Corp CTAS 0.05% 0.99% 0.00% 12.00% 0.01%

Comcast Corp CMCSA 0.69% 1.76% 0.01% 14.61% 0.10%

Molson Coors Brewing Co TAP 0.08% 1.98% 0.00% 8.40% 0.01%

KLA-Tencor Corp KLAC 0.04% 4.16% 0.00% 17.27% 0.01%

Marriott International Inc/MD MAR 0.10% 1.47% 0.00% 14.42% 0.01%

McCormick & Co Inc/MD MKC 0.05% 1.95% 0.00% n/a n/a

Nordstrom Inc JWN 0.08% 2.06% 0.00% 9.60% 0.01%

PACCAR Inc PCAR 0.11% 1.84% 0.00% 7.70% 0.01%

Costco Wholesale Corp COST 0.36% 1.11% 0.00% 9.94% 0.04%

Sigma-Aldrich Corp SIAL 0.09% 0.66% 0.00% 8.62% 0.01%

St Jude Medical Inc STJ 0.10% 1.84% 0.00% 11.40% 0.01%

Stryker Corp SYK 0.20% 1.47% 0.00% 12.31% 0.02%

Tyson Foods Inc TSN 0.07% 0.93% 0.00% 8.60% 0.01%

Altera Corp ALTR 0.09% 1.44% 0.00% 12.27% 0.01%

Applied Materials Inc AMAT 0.10% 2.72% 0.00% 12.66% 0.01%

Time Warner Inc TWX 0.32% 2.04% 0.01% 15.14% 0.05%

Bed Bath & Beyond Inc BBBY 0.06% n/a n/a 7.12% 0.00%

American Airlines Group Inc AAL 0.15% 1.03% 0.00% 17.78% 0.03%

Cardinal Health Inc CAH 0.14% 2.02% 0.00% 12.43% 0.02%

Celgene Corp CELG 0.49% n/a n/a 23.83% 0.12%

Cerner Corp CERN 0.12% n/a n/a 16.78% 0.02%

Cincinnati Financial Corp CINF 0.05% 3.42% 0.00% n/a n/a

Cablevision Systems Corp CVC 0.04% 1.85% 0.00% 3.95% 0.00%

DR Horton Inc DHI 0.06% 0.85% 0.00% 21.58% 0.01%

Flowserve Corp FLS 0.03% 1.75% 0.00% 7.04% 0.00%

Electronic Arts Inc EA 0.12% n/a n/a 14.33% 0.02%

Express Scripts Holding Co ESRX 0.31% n/a n/a 15.62% 0.05%

Expeditors International of Washington Inc EXPD 0.05% 1.53% 0.00% 11.58% 0.01%

Fastenal Co FAST 0.06% 3.06% 0.00% 15.50% 0.01%

M&T Bank Corp MTB 0.09% 2.30% 0.00% 8.09% 0.01%

Fiserv Inc FISV 0.12% n/a n/a 12.80% 0.01%

Fifth Third Bancorp FITB 0.09% 2.75% 0.00% 4.20% 0.00%

Gilead Sciences Inc GILD 0.82% 1.75% 0.01% 6.52% 0.05%

Hasbro Inc HAS 0.05% 2.55% 0.00% 10.20% 0.01%

Huntington Bancshares Inc/OH HBAN 0.05% 2.26% 0.00% 8.64% 0.00%

Welltower Inc HCN 0.14% 4.87% 0.01% 4.55% 0.01%

Biogen Inc BIIB 0.39% n/a n/a 14.45% 0.06%

Linear Technology Corp LLTC 0.06% 2.97% 0.00% 7.20% 0.00%

Range Resources Corp RRC 0.03% 0.50% 0.00% 1.23% 0.00%

Northern Trust Corp NTRS 0.09% 2.11% 0.00% 14.44% 0.01%

Paychex Inc PAYX 0.10% 3.53% 0.00% 9.89% 0.01%

People's United Financial Inc PBCT 0.03% 4.26% 0.00% n/a n/a

Patterson Cos Inc PDCO 0.03% 2.03% 0.00% 8.62% 0.00%

QUALCOMM Inc QCOM 0.48% 3.57% 0.02% 13.00% 0.06%

Roper Technologies Inc ROP 0.09% 0.64% 0.00% 13.17% 0.01%

Ross Stores Inc ROST 0.11% 0.97% 0.00% 11.00% 0.01%

AutoNation Inc AN 0.04% n/a n/a 13.16% 0.00%

Starbucks Corp SBUX 0.48% 1.13% 0.01% 18.11% 0.09%

KeyCorp KEY 0.06% 2.31% 0.00% 7.10% 0.00%

Staples Inc SPLS 0.04% 4.09% 0.00% 2.74% 0.00%

State Street Corp STT 0.16% 2.02% 0.00% 8.91% 0.01%

US Bancorp USB 0.41% 2.49% 0.01% 6.42% 0.03%

Symantec Corp SYMC 0.08% 3.08% 0.00% 8.35% 0.01%

T Rowe Price Group Inc TROW 0.10% 2.99% 0.00% 11.26% 0.01%

Waste Management Inc WM 0.13% 3.09% 0.00% 7.88% 0.01%

CBS Corp CBS 0.10% 1.50% 0.00% 15.02% 0.02%

Allergan plc AGN 0.61% n/a n/a 12.42% 0.08%

Whole Foods Market Inc WFM 0.06% 1.64% 0.00% 12.20% 0.01%

Constellation Brands Inc STZ 0.12% 0.99% 0.00% 12.21% 0.01%

Xilinx Inc XLNX 0.06% 2.92% 0.00% 8.58% 0.01%

DENTSPLY International Inc XRAY 0.04% 0.57% 0.00% 9.62% 0.00%



Page 5 of 7


[6] [7] [8] [9] [10]


Estimated

Dividend Yield

Cap-Weighted

Dividend Yield

Long-Term

Growth Estimate

Cap. Weighted

Long-Term

Growth

Zions Bancorporation ZION 0.03% 0.87% 0.00% 8.47% 0.00%

Invesco Ltd IVZ 0.08% 3.46% 0.00% 11.13% 0.01%

Intuit Inc INTU 0.14% 1.35% 0.00% 17.90% 0.03%

Morgan Stanley MS 0.35% 1.90% 0.01% 11.93% 0.04%

Microchip Technology Inc MCHP 0.05% 3.32% 0.00% 6.30% 0.00%

ACE Ltd ACE 0.19% 2.59% 0.00% 11.20% 0.02%

Chesapeake Energy Corp CHK 0.03% n/a n/a 14.37% 0.00%

O'Reilly Automotive Inc ORLY 0.14% n/a n/a 18.05% 0.03%

Allstate Corp/The ALL 0.13% 2.06% 0.00% 9.70% 0.01%

FLIR Systems Inc FLIR 0.02% 1.57% 0.00% 13.50% 0.00%

Equity Residential EQR 0.16% 2.94% 0.00% 8.01% 0.01%

BorgWarner Inc BWA 0.05% 1.25% 0.00% 11.03% 0.01%

Newfield Exploration Co NFX 0.03% n/a n/a 1.92% 0.00%

Urban Outfitters Inc URBN 0.02% n/a n/a 14.65% 0.00%

Simon Property Group Inc SPG 0.32% 3.37% 0.01% 7.55% 0.02%

Eastman Chemical Co EMN 0.05% 2.47% 0.00% 7.17% 0.00%

AvalonBay Communities Inc AVB 0.13% 2.86% 0.00% 7.40% 0.01%

Prudential Financial Inc PRU 0.20% 3.04% 0.01% 15.78% 0.03%

United Parcel Service Inc UPS 0.39% 2.96% 0.01% 11.49% 0.05%

Apartment Investment & Management Co AIV 0.03% 3.24% 0.00% 7.21% 0.00%

Walgreens Boots Alliance Inc WBA 0.52% 1.73% 0.01% 14.00% 0.07%

McKesson Corp MCK 0.25% 0.61% 0.00% 14.33% 0.04%

Lockheed Martin Corp LMT 0.37% 3.18% 0.01% 8.13% 0.03%

AmerisourceBergen Corp ABC 0.12% 1.22% 0.00% 17.86% 0.02%

Cameron International Corp CAM 0.07% n/a n/a -4.60% 0.00%

Capital One Financial Corp COF 0.22% 2.21% 0.00% 6.42% 0.01%

Waters Corp WAT 0.06% n/a n/a 9.69% 0.01%

Dollar Tree Inc DLTR 0.09% n/a n/a 19.67% 0.02%

Darden Restaurants Inc DRI 0.05% 3.21% 0.00% 12.34% 0.01%

SanDisk Corp SNDK 0.06% 2.21% 0.00% 0.38% 0.00%

Diamond Offshore Drilling Inc DO 0.01% 2.89% 0.00% 16.00% 0.00%

NetApp Inc NTAP 0.05% 2.43% 0.00% 9.98% 0.00%

Citrix Systems Inc CTXS 0.06% n/a n/a 14.38% 0.01%

Goodyear Tire & Rubber Co/The GT 0.05% 0.82% 0.00% 7.00% 0.00%

DaVita HealthCare Partners Inc DVA 0.09% n/a n/a 10.26% 0.01%

Hartford Financial Services Group Inc/The HIG 0.11% 1.83% 0.00% 9.25% 0.01%

Iron Mountain Inc IRM 0.04% 6.13% 0.00% 4.60% 0.00%

Estee Lauder Cos Inc/The EL 0.10% 1.19% 0.00% 11.49% 0.01%

Yahoo! Inc YHOO 0.16% n/a n/a 12.00% 0.02%

Principal Financial Group Inc PFG 0.08% 3.21% 0.00% 10.17% 0.01%

Stericycle Inc SRCL 0.07% n/a n/a 15.46% 0.01%

Universal Health Services Inc UHS 0.07% 0.32% 0.00% 10.35% 0.01%

E*TRADE Financial Corp ETFC 0.04% n/a n/a 16.32% 0.01%

Skyworks Solutions Inc SWKS 0.09% 1.24% 0.00% 19.74% 0.02%

National Oilwell Varco Inc NOV 0.08% 4.89% 0.00% -8.60% -0.01%

Quest Diagnostics Inc DGX 0.05% 2.47% 0.00% 11.30% 0.01%

Activision Blizzard Inc ATVI 0.13% 0.74% 0.00% 9.78% 0.01%

Rockwell Automation Inc ROK 0.08% 2.56% 0.00% 8.17% 0.01%

Kraft Heinz Co/The KHC 0.49% 3.12% 0.02% 11.15% 0.05%

American Tower Corp AMT 0.21% 2.09% 0.00% 14.34% 0.03%

Regeneron Pharmaceuticals Inc REGN 0.27% n/a n/a 22.11% 0.06%

Amazon.com Inc AMZN 1.36% n/a n/a 47.77% 0.65%

Ralph Lauren Corp RL 0.04% 1.69% 0.00% 13.57% 0.01%

Boston Properties Inc BXP 0.10% 2.20% 0.00% 6.23% 0.01%

Amphenol Corp APH 0.09% 1.10% 0.00% 10.70% 0.01%

Pioneer Natural Resources Co PXD 0.10% 0.07% 0.00% 5.60% 0.01%

Valero Energy Corp VLO 0.17% 2.66% 0.00% -1.46% 0.00%

L-3 Communications Holdings Inc LLL 0.05% 2.49% 0.00% 6.79% 0.00%

Western Union Co/The WU 0.05% 3.38% 0.00% 9.03% 0.00%

CH Robinson Worldwide Inc CHRW 0.05% 2.24% 0.00% 10.63% 0.01%

Accenture PLC ACN 0.35% 2.24% 0.01% 10.28% 0.04%

Yum! Brands Inc YUM 0.20% 2.05% 0.00% 11.82% 0.02%

Prologis Inc PLD 0.12% 4.11% 0.00% 4.99% 0.01%

FirstEnergy Corp FE 0.08% 4.60% 0.00% 2.62% 0.00%

VeriSign Inc VRSN 0.05% n/a n/a 10.40% 0.00%

Quanta Services Inc PWR 0.03% n/a n/a 7.45% 0.00%

Henry Schein Inc HSIC 0.06% n/a n/a 11.15% 0.01%

Ameren Corp AEE 0.06% 3.88% 0.00% 6.77% 0.00%

Broadcom Corp BRCM 0.16% 1.09% 0.00% 12.24% 0.02%

NVIDIA Corp NVDA 0.08% 1.58% 0.00% 11.00% 0.01%

Sealed Air Corp SEE 0.06% 1.11% 0.00% 9.77% 0.01%

Cognizant Technology Solutions Corp CTSH 0.22% n/a n/a 15.50% 0.03%

Intuitive Surgical Inc ISRG 0.10% n/a n/a 15.36% 0.01%

CONSOL Energy Inc CNX 0.01% 0.41% 0.00% 15.20% 0.00%

Affiliated Managers Group Inc AMG 0.05% n/a n/a 14.71% 0.01%

Aetna Inc AET 0.22% 0.91% 0.00% 12.06% 0.03%

Republic Services Inc RSG 0.08% 2.91% 0.00% 4.70% 0.00%

eBay Inc EBAY 0.17% n/a n/a 9.71% 0.02%

Goldman Sachs Group Inc/The GS 0.43% 1.50% 0.01% 18.98% 0.08%

Sempra Energy SRE 0.14% 2.90% 0.00% 7.67% 0.01%

Moody's Corp MCO 0.11% 1.38% 0.00% 12.00% 0.01%

Priceline Group Inc/The PCLN 0.36% n/a n/a 19.71% 0.07%



Page 6 of 7


[6] [7] [8] [9] [10]


Estimated

Dividend Yield

Cap-Weighted

Dividend Yield

Long-Term

Growth Estimate

Cap. Weighted

Long-Term

Growth

F5 Networks Inc FFIV 0.05% n/a n/a 15.32% 0.01%

Akamai Technologies Inc AKAM 0.07% n/a n/a 15.80% 0.01%

Reynolds American Inc RAI 0.36% 3.25% 0.01% 6.38% 0.02%

Devon Energy Corp DVN 0.09% 2.59% 0.00% 6.24% 0.01%

Google Inc GOOGL 1.05% n/a n/a 17.33% 0.18%

Red Hat Inc RHT 0.08% n/a n/a 18.58% 0.01%

Hudson City Bancorp Inc HCBK 0.03% 1.57% 0.00% -3.00% 0.00%

Allegion PLC ALLE 0.03% 0.69% 0.00% 14.85% 0.00%

Netflix Inc NFLX 0.25% n/a n/a 32.49% 0.08%

Agilent Technologies Inc A 0.06% 1.17% 0.00% 5.90% 0.00%

Anthem Inc ANTM 0.21% 1.79% 0.00% 9.61% 0.02%

CME Group Inc/IL CME 0.18% 2.16% 0.00% 12.36% 0.02%

Juniper Networks Inc JNPR 0.06% 1.56% 0.00% 11.84% 0.01%

BlackRock Inc BLK 0.28% 2.93% 0.01% 14.62% 0.04%

DTE Energy Co DTE 0.08% 3.63% 0.00% 5.12% 0.00%

Nasdaq Inc NDAQ 0.05% 1.88% 0.00% 6.88% 0.00%

Philip Morris International Inc PM 0.70% 5.14% 0.04% 5.87% 0.04%

Time Warner Cable Inc TWC 0.29% 1.67% 0.00% 5.57% 0.02%

salesforce.com inc CRM 0.26% n/a n/a 28.06% 0.07%

MetLife Inc MET 0.30% 3.18% 0.01% 7.25% 0.02%

Monsanto Co MON 0.23% 2.53% 0.01% 11.52% 0.03%

Coach Inc COH 0.05% 4.67% 0.00% 11.38% 0.01%

Fluor Corp FLR 0.03% 1.98% 0.00% 4.59% 0.00%

Dun & Bradstreet Corp/The DNB 0.02% 1.76% 0.00% 10.15% 0.00%

Edwards Lifesciences Corp EW 0.09% n/a n/a 15.20% 0.01%

Ameriprise Financial Inc AMP 0.11% 2.46% 0.00% 11.65% 0.01%

Xcel Energy Inc XEL 0.10% 3.61% 0.00% 5.04% 0.01%

Rockwell Collins Inc COL 0.06% 1.61% 0.00% 9.78% 0.01%

FMC Technologies Inc FTI 0.04% n/a n/a 4.77% 0.00%

Zimmer Biomet Holdings Inc ZBH 0.11% 0.94% 0.00% 10.97% 0.01%

CBRE Group Inc CBG 0.06% n/a n/a 10.50% 0.01%

MasterCard Inc MA 0.57% 0.71% 0.00% 16.50% 0.09%

Signet Jewelers Ltd SIG 0.06% 0.65% 0.00% 8.00% 0.00%

GameStop Corp GME 0.02% 3.49% 0.00% 13.58% 0.00%

CarMax Inc KMX 0.07% n/a n/a 14.98% 0.01%

Intercontinental Exchange Inc ICE 0.15% 1.28% 0.00% 15.55% 0.02%

Fidelity National Information Services Inc FIS 0.11% 1.55% 0.00% 12.62% 0.01%

Chipotle Mexican Grill Inc CMG 0.13% n/a n/a 21.37% 0.03%

Pepco Holdings Inc POM 0.03% 4.46% 0.00% 5.53% 0.00%

Wynn Resorts Ltd WYNN 0.03% 3.77% 0.00% 9.27% 0.00%

Assurant Inc AIZ 0.03% 2.53% 0.00% 8.14% 0.00%

NRG Energy Inc NRG 0.03% 3.91% 0.00% 23.90% 0.01%

Genworth Financial Inc GNW 0.01% n/a n/a 5.00% 0.00%

Regions Financial Corp RF 0.07% 2.66% 0.00% 2.86% 0.00%

Monster Beverage Corp MNST 0.16% n/a n/a 20.50% 0.03%

Teradata Corp TDC 0.02% n/a n/a 10.25% 0.00%

Mosaic Co/The MOS 0.06% 3.54% 0.00% 6.00% 0.00%

Expedia Inc EXPE 0.08% 0.82% 0.00% 10.00% 0.01%

Discovery Communications Inc DISCA 0.02% n/a n/a 10.35% 0.00%

CF Industries Holdings Inc CF 0.06% 2.67% 0.00% 9.00% 0.01%

Viacom Inc VIAB 0.09% 3.71% 0.00% 9.25% 0.01%

Wyndham Worldwide Corp WYN 0.05% 2.34% 0.00% 10.00% 0.00%

Google Inc GOOG 1.19% n/a n/a 17.33% 0.21%

Spectra Energy Corp SE 0.10% 5.63% 0.01% 3.95% 0.00%

First Solar Inc FSLR 0.02% n/a n/a -7.95% 0.00%

Mead Johnson Nutrition Co MJN 0.08% 2.34% 0.00% 8.80% 0.01%

Ensco PLC ESV 0.02% 4.26% 0.00% -4.30% 0.00%

TE Connectivity Ltd TEL 0.14% 2.20% 0.00% 10.00% 0.01%

Discover Financial Services DFS 0.13% 2.15% 0.00% 8.90% 0.01%

TripAdvisor Inc TRIP 0.05% n/a n/a 20.75% 0.01%

Dr Pepper Snapple Group Inc DPS 0.09% 2.43% 0.00% 7.26% 0.01%

Scripps Networks Interactive Inc SNI 0.03% 1.87% 0.00% 11.45% 0.00%

Visa Inc V 0.77% 0.69% 0.01% 18.08% 0.14%

Xylem Inc/NY XYL 0.03% 1.71% 0.00% 9.87% 0.00%

Marathon Petroleum Corp MPC 0.14% 2.76% 0.00% 2.52% 0.00%

Level 3 Communications Inc LVLT 0.09% n/a n/a 26.99% 0.02%

Tractor Supply Co TSCO 0.07% 0.95% 0.00% 15.37% 0.01%

Transocean Ltd RIG 0.03% 4.64% 0.00% -25.40% -0.01%

Essex Property Trust Inc ESS 0.08% 2.58% 0.00% 7.08% 0.01%

General Growth Properties Inc GGP 0.13% 2.77% 0.00% 7.51% 0.01%

Realty Income Corp O 0.06% 4.82% 0.00% 3.92% 0.00%

Seagate Technology PLC STX 0.08% 4.82% 0.00% 8.30% 0.01%

WestRock Co WRK 0.08% 2.92% 0.00% 7.19% 0.01%

Western Digital Corp WDC 0.10% 2.52% 0.00% 5.00% 0.01%

Twenty-First Century Fox Inc FOX 0.12% 1.11% 0.00% 15.58% 0.02%

Comcast Corp CMCSK 0.12% 1.75% 0.00% 14.61% 0.02%

Fossil Group Inc FOSL 0.02% n/a n/a 6.85% 0.00%

JB Hunt Transport Services Inc JBHT 0.05% 1.18% 0.00% 14.67% 0.01%

Lam Research Corp LRCX 0.06% 1.84% 0.00% 6.11% 0.00%

Mohawk Industries Inc MHK 0.08% n/a n/a 12.05% 0.01%

Pentair PLC PNR 0.05% 2.51% 0.00% 15.48% 0.01%

Vertex Pharmaceuticals Inc VRTX 0.15% n/a n/a 29.00% 0.04%



Page 7 of 7


[6] [7] [8] [9] [10]


Estimated

Dividend Yield

Cap-Weighted

Dividend Yield

Long-Term

Growth Estimate

Cap. Weighted

Long-Term

Growth

Facebook Inc FB 1.16% n/a n/a 24.05% 0.28%

United Rentals Inc URI 0.03% n/a n/a 12.20% 0.00%

United Continental Holdings Inc UAL 0.12% n/a n/a 25.23% 0.03%

Baxalta Inc BXLT 0.12% 0.89% 0.00% 8.00% 0.01%

Delta Air Lines Inc DAL 0.20% 1.20% 0.00% 22.14% 0.05%

Navient Corp NAVI 0.02% 5.69% 0.00% n/a n/a

Mallinckrodt PLC MNK 0.04% n/a n/a 13.04% 0.01%

News Corp NWS 0.01% 1.56% 0.00% 10.35% 0.00%

Keurig Green Mountain Inc GMCR 0.05% 2.21% 0.00% 15.17% 0.01%

Macerich Co/The MAC 0.07% 3.38% 0.00% 7.32% 0.01%

Martin Marietta Materials Inc MLM 0.06% 1.05% 0.00% 24.06% 0.01%

PayPal Holdings Inc PYPL 0.22% n/a n/a 13.00% 0.03%

Alexion Pharmaceuticals Inc ALXN 0.20% n/a n/a 22.73% 0.05%

Columbia Pipeline Group Inc CPGX 0.03% 2.73% 0.00% 36.00% 0.01%

Endo International PLC ENDP 0.09% n/a n/a 9.87% 0.01%

News Corp NWSA 0.03% 1.58% 0.00% 10.35% 0.00%

Crown Castle International Corp CCI 0.15% 4.16% 0.01% 22.67% 0.03%

Delphi Automotive PLC DLPH 0.12% 1.32% 0.00% 13.73% 0.02%

Advance Auto Parts Inc AAP 0.08% 0.13% 0.00% 13.81% 0.01%

Michael Kors Holdings Ltd KORS 0.05% n/a n/a 26.34% 0.01%

Alliance Data Systems Corp ADS 0.09% n/a n/a 14.60% 0.01%

Nielsen Holdings PLC NLSN 0.09% 2.52% 0.00% 13.33% 0.01%

Garmin Ltd GRMN 0.04% 5.69% 0.00% 7.14% 0.00%

Cimarex Energy Co XEC 0.06% 0.62% 0.00% -3.95% 0.00%

Zoetis Inc ZTS 0.12% 0.81% 0.00% 12.50% 0.01%

Equinix Inc EQIX 0.09% 2.47% 0.00% 38.74% 0.03%

Discovery Communications Inc DISCK 0.04% n/a n/a 10.35% 0.00%

Notes:

[1] Equals sum of col. [8]

[2] Equals sum of col. [10]

[3] Equals ([1] x (1 + (0.5 x [2]))) + [2]

[4] Source: Schedule 7.3

[5] Equals [3] - [4]

[6] Equals weight in S&P 500 based on market capitalization


[8] Equals [6] x [7]


[10] Equals [6] x [9]



Page 1 of 1

CAPITAL ASSET PRICING MODEL

K = Rf + β (Rm − Rf)

[4] [5] [6] [7] [8]

Market

Risk-Free Market Risk

Rate Beta Return Premium ROE

(Rf) (β) (Rm) (Rm − Rf) (K)

Proxy Group Average Bloomberg Beta

Current 30-day average of 30-year U.S. Treasury bond yield [1] 2.92% 0.661 13.40% 10.48% 9.86%

Near-term projected 30-year U.S. Treasury bond yield (Q3 2015 - Q4 2016) [2] 3.40% 0.661 13.40% 10.00% 10.02%

Projected 30-year U.S. Treasury bond yield (2017 - 2021) [3] 4.80% 0.661 13.40% 8.60% 10.49%

Average: 10.12%

Median: 10.02%

Proxy Group Average Value Line Beta

Current 30-day average of 30-year U.S. Treasury bond yield [1] 2.92% 0.765 13.40% 10.48% 10.95%

Near-term projected 30-year U.S. Treasury bond yield (Q3 2015 - Q4 2016) [2] 3.40% 0.765 13.40% 10.00% 11.06%

Projected 30-year U.S. Treasury bond yield (2017 - 2021) [3] 4.80% 0.765 13.40% 8.60% 11.39%

Average: 11.13%

Median: 11.06%

Notes:


[2] Source: Blue Chip Financial Forecasts, Vol. 34, No. 9, September 1, 2015, at 2

[3] Source: Blue Chip Financial Forecasts, Vol. 34, No. 6, June 1, 2015, at 14

[4] See Notes [1], [2], and [3]

[5] Source: Bloomberg Professional and Value Line


[7] Equals [6] − [4]

[8] Equals [4] + [5] x [7]



Page 1 of 2

TREASURY BOND YIELD PLUS RISK PREMIUM

[1] [2] [3]Average

Authorized

Electric

ROE

U.S.

Govt. 30-

year

Treasury

Risk

Premium

1993.1 11.84% 7.07% 4.77%

1993.2 11.64% 6.86% 4.79%

1993.3 11.15% 6.31% 4.84%

1993.4 11.04% 6.14% 4.90%

1994.1 11.07% 6.57% 4.49%

1994.2 11.13% 7.35% 3.78%

1994.3 12.75% 7.58% 5.17%

1994.4 11.24% 7.96% 3.28%

1995.1 11.96% 7.63% 4.34%

1995.2 11.32% 6.94% 4.37%

1995.3 11.37% 6.71% 4.66%

1995.4 11.58% 6.23% 5.35%

1996.1 11.46% 6.29% 5.17%

1996.2 11.46% 6.92% 4.54%

1996.3 10.70% 6.96% 3.74%

1996.4 11.56% 6.62% 4.94%

1997.1 11.08% 6.81% 4.27%

1997.2 11.62% 6.93% 4.68%

1997.3 12.00% 6.53% 5.47%

1997.4 11.06% 6.14% 4.92%

1998.1 11.31% 5.88% 5.43%

1998.2 12.20% 5.85% 6.35%

1998.3 11.65% 5.47% 6.18%

1998.4 12.30% 5.10% 7.20%

1999.1 10.40% 5.37% 5.03%

1999.2 10.94% 5.79% 5.15%

1999.3 10.75% 6.04% 4.71%

1999.4 11.10% 6.25% 4.85%

2000.1 11.21% 6.29% 4.92%

2000.2 11.00% 5.97% 5.03%

2000.3 11.68% 5.79% 5.89%

2000.4 12.50% 5.69% 6.81%

2001.1 11.38% 5.44% 5.93%

2001.2 10.88% 5.70% 5.18%

2001.3 10.76% 5.52% 5.23%

2001.4 11.57% 5.30% 6.27%

2002.1 10.05% 5.51% 4.54%

2002.2 11.41% 5.61% 5.79%

2002.3 11.25% 5.08% 6.17%

2002.4 11.57% 4.93% 6.64%

2003.1 11.43% 4.85% 6.58%

2003.2 11.16% 4.60% 6.56%

2003.3 9.88% 5.11% 4.76%

2003.4 11.09% 5.11% 5.98%

2004.1 11.00% 4.88% 6.12%

2004.2 10.64% 5.32% 5.32%

2004.3 10.75% 5.06% 5.69%

2004.4 10.91% 4.86% 6.04%

2005.1 10.56% 4.69% 5.87%

2005.2 10.13% 4.47% 5.66%

2005.3 10.85% 4.44% 6.41%

2005.4 10.59% 4.68% 5.91%

2006.1 10.38% 4.63% 5.75%

2006.2 10.63% 5.14% 5.49%

2006.3 10.06% 4.99% 5.07%

2006.4 10.39% 4.74% 5.65%

2007.1 10.39% 4.80% 5.59%

2007.2 10.27% 4.99% 5.28%

2007.3 10.02% 4.95% 5.07%

2007.4 10.43% 4.61% 5.81%

2008.1 10.15% 4.41% 5.75%

2008.2 10.54% 4.57% 5.97%

2008.3 10.38% 4.44% 5.94%

2008.4 10.39% 3.65% 6.74%

2009.1 10.45% 3.44% 7.01%

2009.2 10.58% 4.17% 6.42%

2009.3 10.46% 4.32% 6.14%

2009.4 10.54% 4.34% 6.21%

2010.1 10.45% 4.62% 5.82%

2010.2 10.08% 4.36% 5.71%

2010.3 10.29% 3.86% 6.43%

2010.4 10.34% 4.17% 6.17%

2011.1 9.96% 4.56% 5.40%

2011.2 10.12% 4.34% 5.78%

2011.3 10.36% 3.69% 6.67%

2011.4 10.34% 3.04% 7.31%

2012.1 10.30% 3.14% 7.17%

2012.2 9.92% 2.93% 6.98%

2012.3 9.78% 2.74% 7.04%

2012.4 10.07% 2.86% 7.21%

2013.1 9.77% 3.13% 6.64%

2013.2 9.84% 3.14% 6.70%

2013.3 9.83% 3.71% 6.12%

2013.4 9.82% 3.79% 6.04%

2014.1 9.57% 3.69% 5.88%

2014.2 9.83% 3.44% 6.39%

2014.3 9.79% 3.26% 6.52%

2014.4 9.78% 2.96% 6.81%

2015.1 9.66% 2.55% 7.11%

2015.2 9.50% 2.88% 6.61%

2015.3 9.40% 2.96% 6.44%

AVERAGE 10.76% 5.05% 5.71%

MEDIAN 10.64% 4.99% 5.79%



Page 2 of 2

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.844895

R Square 0.713847

Adjusted R Square 0.710632

Standard Error 0.004700

Observations 91

ANOVA

df SS MS F Significance F

Regression 1 0.004905 0.004905 222.022480 0.000000

Residual 89 0.001966 0.000022

Total 90 0.006871

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

Intercept 0.0857 0.001983 43.23 0.000000 0.081762 0.089640 0.081762 0.089640

U.S. Govt. 30-year Treasury (0.5670) 0.038053 (14.90) 0.000000 (0.642615) (0.491394) (0.642615) (0.491394)

[7] [8] [9]

U.S. Govt.

30-year Risk

Treasury Premium ROE

Current 30-Day Average [4] 2.92% 6.91% 9.83%

Blue Chip Consensus Forecast (Q3 2015 - Q4 2016) [5] 3.40% 6.64% 10.04%

Blue Chip Consensus Forecast (2017-2021) [6] 4.80% 5.85% 10.65%

AVERAGE 6.47% 10.18%

Notes:

[1] Source: Regulatory Research Associates

[2] Source: Bloomberg Professional, quarterly bond yields are an average of the trading days in each quarter

[3] Equals Column [1] − Column [2]


[5] Source: Blue Chip Financial Forecasts, Vol. 34, No. 9, September 1, 2015, at 2

[6] Source: Blue Chip Financial Forecasts, Vol. 34, No. 6, June 1, 2015, at 14

[7] See notes [4], [5] & [6]

[8] Equals 0.085701 + (-0.567005 x Column [7])

[9] Equals Column [7] + Column [8]

y = -0.567x + 0.0857 R² = 0.7138

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%

Ris

k P

rem

ium

U.S. Government 30-year Treasury Yield



Page 1 of 2

UTILITY BOND YIELD PLUS RISK PREMIUM

[1] [2] [3]

Average

Authorize

d Electric

ROE

Moodys A-

Rated Utility

Bond

Risk

Premium

1993.1 11.84% 8.06% 3.78%

1993.2 11.64% 7.80% 3.84%

1993.3 11.15% 7.27% 3.88%

1993.4 11.04% 7.22% 3.82%

1994.1 11.07% 7.56% 3.51%

1994.2 11.13% 8.29% 2.84%

1994.3 12.75% 8.50% 4.25%

1994.4 11.24% 8.86% 2.37%

1995.1 11.96% 8.54% 3.42%

1995.2 11.32% 7.91% 3.41%

1995.3 11.37% 7.72% 3.65%

1995.4 11.58% 7.38% 4.20%

1996.1 11.46% 7.44% 4.02%

1996.2 11.46% 7.97% 3.48%

1996.3 10.70% 7.96% 2.74%

1996.4 11.56% 7.62% 3.94%

1997.1 11.08% 7.77% 3.31%

1997.2 11.62% 7.88% 3.73%

1997.3 12.00% 7.48% 4.52%

1997.4 11.06% 7.25% 3.81%

1998.1 11.31% 7.11% 4.20%

1998.2 12.20% 7.11% 5.09% Regression Statistics

1998.3 11.65% 6.99% 4.66%

1998.4 12.30% 6.97% 5.34%

1999.1 10.40% 7.12% 3.28%

1999.2 10.94% 7.48% 3.46%

1999.3 10.75% 7.85% 2.90%

1999.4 11.10% 8.05% 3.05%

2000.1 11.21% 8.29% 2.92%

2000.2 11.00% 8.46% 2.54%

2000.3 11.68% 8.20% 3.48%

2000.4 12.50% 8.04% 4.46%

2001.1 11.38% 7.73% 3.64%

2001.2 10.88% 7.93% 2.95%

2001.3 10.76% 7.70% 3.06%

2001.4 11.57% 7.67% 3.90%

2002.1 10.05% 7.65% 2.40%

2002.2 11.41% 7.50% 3.90%

2002.3 11.25% 7.19% 4.06%

2002.4 11.57% 7.15% 4.42%

2003.1 11.43% 6.93% 4.50%

2003.2 11.16% 6.39% 4.77%

2003.3 9.88% 6.64% 3.24%

2003.4 11.09% 6.35% 4.74%

2004.1 11.00% 6.08% 4.92%

2004.2 10.64% 6.47% 4.17%

2004.3 10.75% 6.13% 4.62%

2004.4 10.91% 5.95% 4.95%

2005.1 10.56% 5.75% 4.81%

2005.2 10.13% 5.52% 4.60%

2005.3 10.85% 5.51% 5.34%

2005.4 10.59% 5.82% 4.77%

2006.1 10.38% 5.86% 4.52%

2006.2 10.63% 6.37% 4.26%

2006.3 10.06% 6.19% 3.88%

2006.4 10.39% 5.87% 4.52%

2007.1 10.39% 5.90% 4.49%

2007.2 10.27% 6.08% 4.18%

2007.3 10.02% 6.22% 3.79%

2007.4 10.43% 6.08% 4.35%

2008.1 10.15% 6.14% 4.01%

2008.2 10.54% 6.31% 4.22%

2008.3 10.38% 6.42% 3.96%

2008.4 10.39% 7.21% 3.18%

2009.1 10.45% 6.37% 4.07%

2009.2 10.58% 6.39% 4.20%

2009.3 10.46% 5.74% 4.72%

2009.4 10.54% 5.66% 4.88%

2010.1 10.45% 5.83% 4.62%

2010.2 10.08% 5.59% 4.48%

2010.3 10.29% 5.09% 5.20%

2010.4 10.34% 5.35% 4.99%

2011.1 9.96% 5.60% 4.36%

2011.2 10.12% 5.37% 4.75%

2011.3 10.36% 4.80% 5.56%

2011.4 10.34% 4.37% 5.98%

2012.1 10.30% 4.39% 5.91%

2012.2 9.92% 4.23% 5.69%

2012.3 9.78% 3.98% 5.80%

2012.4 10.07% 3.92% 6.15%

2013.1 9.77% 4.18% 5.59%

2013.2 9.84% 4.22% 5.62%

2013.3 9.83% 4.74% 5.10%

2013.4 9.82% 4.76% 5.07%

2014.1 9.57% 4.56% 5.01%

2014.2 9.83% 4.32% 5.51%

2014.3 9.79% 4.20% 5.59%

2014.4 9.78% 4.03% 5.75%

2015.1 9.66% 3.67% 5.99%

2015.2 9.50% 4.10% 5.39%

2015.3 9.40% 4.34% 5.06%

AVERAGE 10.76% 6.45% 4.31%

MEDIAN 10.64% 6.39% 4.26%



Page 2 of 2

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.867997

R Square 0.753419

Adjusted R Square 0.750649

Standard Error 0.004492

Observations 91

ANOVA

df SS MS F Significance F

Regression 1 0.005488 0.005488 271.936524 0.000000

Residual 89 0.001796 0.000020

Total 90 0.007284

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

Intercept 0.0801 0.002292 34.94 0.000000 0.075515 0.084622 0.075515 0.084622

Moodys A-Rated Utility Bond (0.5737) 0.034789 (16.49) 0.000000 (0.642806) (0.504557) (0.642806) (0.504557)

[7] [8] [9]

Moodys A-

Rated Risk

Utility Bond Premium ROE

Current 30-Day Average [4] 4.35% 5.51% 9.86%

Near-Term Consensus Forecast (Q3 2015 - Q4 2016) [5] 4.73% 5.29% 10.02%

Long-Term Consensus Forecast (2017 - 2021) [6] 6.13% 4.49% 10.62%

AVERAGE 5.10% 10.17%

Notes:

[1] Source: Regulatory Research Associates

[2] Source: Bloomberg Professional, quarterly bond yields are an average of the trading days in each quarter

[3] Equals Column [1] − Column [2]


[5] Equals Blue Chip Financial Forecasts near-term 30-year Treasury bond yield (3.40%) plus average daily spread between Treasury and utility bond yields since 2008 Q4 (1.33%)

[6] Equals Blue Chip Financial Forecasts long-term 30-year Treasury bond yield (4.80%) plus average daily spread between Treasury and utility bond yields since 2008 Q4 (1.33%)

[7] See notes [4], [5] & [6]

y = -0.5737x + 0.0801 R² = 0.7534

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%

Ris

k P

rem

ium

Moodys A-Rated Utility Bond Yield



Page 1 of 2

2015-2019 CAPITAL EXPENDITURES AS A PERCENT OF 2014 NET PLANT

($ Millions)

[1] [2] [3] [4] [5] [6] [7]

2015-19

Cap. Ex. /

2014

2014 2015 2016 2017 2018 2019 Net Plant

ALLETE, Inc. ALE

Capital Spending per Share $5.70 $4.75 $5.13 $5.50 $5.50

Common Shares Outstanding 49.00 49.25 49.63 50.00 50.00

Capital Expenditures $279.3 $233.9 $254.3 $275.0 $275.0 40.09%

Net Plant $3,286.4




Capital Expenditures $982.4 $1,008.0 $1,066.9 $1,127.0 $1,127.0 82.45%

Net Plant $6,442.0




Capital Expenditures $1,965.5 $1,734.9 $1,773.5 $1,812.5 $1,812.5 52.22%

Net Plant $17,424.0





Net Plant $44,117.0





Net Plant $70,046.0





Net Plant $2,488.4





Net Plant $1,910.3





Net Plant $8,279.6

IDACORP, Inc. IDA


Common Shares Outstanding 50.30 50.30 $50.30 50.30 50.30


Net Plant $3,833.5





Net Plant $6,979.9

Pinnacle West Capital Corporation PNW




Net Plant $11,194.0



Page 2 of 2


($ Millions)

[1] [2] [3] [4] [5] [6] [7]

2015-19

Cap. Ex. /

2014

2014 2015 2016 2017 2018 2019 Net Plant





Net Plant $4,270.0




Capital Expenditures $910.0 $972.0 $1,055.3 $1,141.0 $1,141.0 61.83%

Net Plant $8,441.5

NSP-Minnesota NSPM

Capital Expenditures [8] $1,773.0 $1,182.0 $923.0 $1,003.0 $1,136.0 55.40%

Net Plant [9] $10,861.0

NSPM Total $6,017.0

NSPM as % Proxy Group Median 1.10

Annual Average $1,203.4

Notes:

[1]-[6] Source: Value Line at July 31, 2015, August 21, 2015 and September 18, 2015

[7] Equals sum of [2]-[6] divided by [1]

[8] Source: Forecast provided by NSP-Minnesota

[9] Source: 2014 FERC Form 1, pages 200-201.



Page 1 of 1


Projected CAPEX / 2014 Net Plant

Company 2015-19

Great Plains Energy Inc. GXP 38.34%

IDACORP, Inc. IDA 39.53%

ALLETE, Inc. ALE 40.09%

OGE Energy Corporation OGE 40.39%

Empire District Electric Company EDE 40.62%

American Electric Power Company, Inc. AEP 48.48%

Pinnacle West Capital Corporation PNW 50.26%

PNM Resources, Inc. PNM 51.52%

Ameren Corporation AEE 52.22%

NSP-Minnesota NSPM 55.40%

Duke Energy Corporation DUK 57.36%

El Paso Electric Company EE 61.79%

Westar Energy, Inc. WR 61.83%

Alliant Energy Corporation LNT 82.45%

Proxy Group Median 50.26%

NSPM/Proxy Group 1.10

Notes:

Source: Schedule 9.1, col. [7]

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

GXP IDA ALE OGE EDE AEP PNW PNM AEE NSPM DUK EE WR LNT

2015-1

9 C

ap

Ex / 2

014 N

et

Pla

nt

Median = 50.26%



Page 1 of 1

ROE Adjustment Mechanism for 5-year MYRP

Scenario #1

Current Authorized ROE - Year 1 10.00%

Change in Moody's A-rated Utility Bond Yield 0.50%

Coefficient 0.57

Change in Authorized ROE 0.29%

Authorized ROE for Year 2 10.29%

Scenario #2

Current Authorized ROE - Year 1 10.00%

Change in Moody's A-rated Utility Bond Yield -0.25%

Coefficient 0.57

Change in Authorized ROE -0.14%

Authorized ROE for Year 2 9.86%



Page 1 of 2

CAPITAL STRUCTURE ANALYSIS CAPITAL STRUCTURE ANALYSIS

COMMON EQUITY RATIO LONG-TERM DEBT RATIO

Electric Proxy Group Company Ticker 2015Q2 2015Q1 2014Q4 2014Q3 Average

ALLETE, Inc. ALE 58.93% 58.70% 56.98% 56.18% 57.70%

Alliant Energy Corporation LNT 51.18% 50.32% 50.11% 54.23% 51.46%

Ameren Corporation AEE 52.44% 52.88% 52.82% 54.54% 53.17%

American Electric Power Company, Inc. AEP 49.63% 52.23% 52.11% 52.27% 51.56%

Duke Energy Corporation DUK 57.52% 58.32% 57.62% 56.60% 57.51%

El Paso Electric Company EE 49.04% 48.79% 49.01% 53.63% 50.12%

Empire District Electric Company EDE 51.38% 51.47% 51.28% 53.31% 51.86%

Great Plains Energy Inc. GXP 53.19% 53.21% 53.30% 53.42% 53.28%

IDACORP, Inc. IDA 51.61% 49.38% 52.94% 52.92% 51.71%

OGE Energy Corporation OGE 53.31% 52.98% 53.08% 55.43% 53.70%

Pinnacle West Capital Corporation PNW 55.72% 55.86% 57.54% 58.43% 56.89%

PNM Resources, Inc. PNM 52.56% 52.70% 52.40% 52.96% 52.65%

Westar Energy, Inc. WR 67.60% 66.54% 65.73% 65.95% 66.46%

MEAN 54.16% 54.11% 54.22% 55.37% 54.47%

LOW 49.04% 48.79% 49.01% 52.27% 50.12%

HIGH 67.60% 66.54% 65.73% 65.95% 66.46%

COMMON EQUITY RATIO - ELECTRIC UTILITY OPERATING COMPANIES LONG-TERM DEBT RATIO - ELECTRIC UTILITY OPERATING COMPANIES

Company Name Ticker 2015Q2 2015Q1 2014Q4 2014Q3 Average

ALLETE (Minnesota Power) ALE 57.67% 57.56% 55.24% 53.98% 56.11%

Superior Water, Light and Power Company ALE 60.19% 59.83% 58.72% 58.39% 59.28%

Interstate Power and Light Company LNT 51.72% 50.09% 49.90% 54.01% 51.43%

Wisconsin Power and Light Company LNT 50.65% 50.54% 50.32% 54.45% 51.49%

Ameren Illinois Company AEE 54.67% 54.39% 53.90% 56.91% 54.97%

Union Electric Company AEE 50.21% 51.37% 51.74% 52.17% 51.37%

AEP Texas Central Company AEP 47.46% 45.01% 42.39% 43.93% 44.70%

AEP Texas North Company AEP 48.87% 47.15% 46.96% 47.06% 47.51%

Appalachian Power Company AEP 46.50% 46.52% 45.83% 46.29% 46.28%

Indiana Michigan Power Company AEP 52.08% 51.94% 51.36% 51.45% 51.71%

Kentucky Power Company AEP 43.87% 44.19% 44.74% 46.25% 44.76%

Kingsport Power Company AEP 60.44% 60.77% 61.00% 60.55% 60.69%

Ohio Power Company AEP 50.33% 49.30% 48.96% 46.03% 48.65%

Public Service Company of Oklahoma AEP 45.29% 44.66% 49.69% 49.43% 47.27%

Southwestern Electric Power Company AEP 47.62% 46.25% 50.46% 50.60% 48.73%

Wheeling Power Company AEP 53.82% 86.56% 79.75% 81.14% 75.32%

Duke Energy Carolinas, LLC DUK 57.36% 57.01% 57.84% 56.60% 57.20%

Duke Energy Florida, Inc. DUK 53.55% 52.74% 53.90% 50.98% 52.79%

Duke Energy Indiana, Inc. DUK 52.70% 50.98% 50.28% 49.88% 50.96%

Duke Energy Kentucky, Inc. DUK 58.11% 57.68% 56.58% 54.78% 56.79%

Duke Energy Ohio, Inc. DUK 69.31% 79.18% 76.64% 76.40% 75.38%

Duke Energy Progress, Inc. DUK 54.07% 52.33% 50.48% 50.99% 51.97%



Kansas City Power & Light Company GXP 50.18% 49.84% 49.53% 49.54% 49.77%

KCP&L Greater Missouri Operations Company GXP 56.20% 56.57% 57.07% 57.30% 56.79%

Idaho Power Co. IDA 51.61% 49.38% 52.94% 52.92% 51.71%

Oklahoma Gas and Electric Company OGE 53.31% 52.98% 53.08% 55.43% 53.70%

Arizona Public Service Company PNW 55.72% 55.86% 57.54% 58.43% 56.89%

Public Service Company of New Mexico PNM 45.63% 46.11% 45.86% 47.43% 46.26%

Texas-New Mexico Power Company PNM 59.48% 59.29% 58.93% 58.49% 59.05%

Kansas Gas and Electric Company WR 72.43% 72.15% 71.99% 72.65% 72.31%

Westar Energy (KPL) WR 62.76% 60.94% 59.48% 59.26% 60.61%

Source: SNL Financial



Page 2 of 2

CAPITAL STRUCTURE ANALYSIS

LONG-TERM DEBT RATIO

Electric Proxy Group Company Ticker 2015Q2 2015Q1 2014Q4 2014Q3 Average

ALLETE, Inc. ALE 41.07% 41.30% 43.02% 43.82% 42.30%

Alliant Energy Corporation LNT 48.82% 49.68% 49.89% 45.77% 48.54%

Ameren Corporation AEE 47.56% 47.12% 47.18% 45.46% 46.83%

American Electric Power Company, Inc. AEP 50.37% 47.77% 47.89% 47.73% 48.44%

Duke Energy Corporation DUK 42.48% 41.68% 42.38% 43.40% 42.49%



Great Plains Energy Inc. GXP 46.81% 46.79% 46.70% 46.58% 46.72%

IDACORP, Inc. IDA 48.39% 50.62% 47.06% 47.08% 48.29%

OGE Energy Corporation OGE 46.69% 47.02% 46.92% 44.57% 46.30%

Pinnacle West Capital Corporation PNW 44.28% 44.14% 42.46% 41.57% 43.11%

PNM Resources, Inc. PNM 47.44% 47.30% 47.60% 47.04% 47.35%

Westar Energy, Inc. WR 32.40% 33.46% 34.27% 34.05% 33.54%

MEAN 45.84% 45.89% 45.78% 44.63% 45.53%

LOW 32.40% 33.46% 34.27% 34.05% 33.54%

HIGH 50.96% 51.21% 50.99% 47.73% 49.88%

LONG-TERM DEBT RATIO - ELECTRIC UTILITY OPERATING COMPANIES

Company Name Ticker 2015Q2 2015Q1 2014Q4 2014Q3 Average

ALLETE (Minnesota Power) ALE 42.33% 42.44% 44.76% 46.02% 43.89%

Superior Water, Light and Power Company ALE 39.81% 40.17% 41.28% 41.61% 40.72%

Interstate Power and Light Company LNT 48.28% 49.91% 50.10% 45.99% 48.57%

Wisconsin Power and Light Company LNT 49.35% 49.46% 49.68% 45.55% 48.51%

Ameren Illinois Company AEE 45.33% 45.61% 46.10% 43.09% 45.03%

Union Electric Company AEE 49.79% 48.63% 48.26% 47.83% 48.63%

AEP Texas Central Company AEP 52.54% 54.99% 57.61% 56.07% 55.30%

AEP Texas North Company AEP 51.13% 52.85% 53.04% 52.94% 52.49%

Appalachian Power Company AEP 53.50% 53.48% 54.17% 53.71% 53.72%

Indiana Michigan Power Company AEP 47.92% 48.06% 48.64% 48.55% 48.29%

Kentucky Power Company AEP 56.13% 55.81% 55.26% 53.75% 55.24%

Kingsport Power Company AEP 39.56% 39.23% 39.00% 39.45% 39.31%

Ohio Power Company AEP 49.67% 50.70% 51.04% 53.97% 51.35%

Public Service Company of Oklahoma AEP 54.71% 55.34% 50.31% 50.57% 52.73%

Southwestern Electric Power Company AEP 52.38% 53.75% 49.54% 49.40% 51.27%

Wheeling Power Company AEP 46.18% 13.44% 20.25% 18.86% 24.68%

Duke Energy Carolinas, LLC DUK 42.64% 42.99% 42.16% 43.40% 42.80%

Duke Energy Florida, Inc. DUK 46.45% 47.26% 46.10% 49.02% 47.21%

Duke Energy Indiana, Inc. DUK 47.30% 49.02% 49.72% 50.12% 49.04%

Duke Energy Kentucky, Inc. DUK 41.89% 42.32% 43.42% 45.22% 43.21%

Duke Energy Ohio, Inc. DUK 30.69% 20.82% 23.36% 23.60% 24.62%

Duke Energy Progress, Inc. DUK 45.93% 47.67% 49.52% 49.01% 48.03%



Kansas City Power & Light Company GXP 49.82% 50.16% 50.47% 50.46% 50.23%

KCP&L Greater Missouri Operations Company GXP 43.80% 43.43% 42.93% 42.70% 43.21%

Idaho Power Co. IDA 48.39% 50.62% 47.06% 47.08% 48.29%

Oklahoma Gas and Electric Company OGE 46.69% 47.02% 46.92% 44.57% 46.30%

Arizona Public Service Company PNW 44.28% 44.14% 42.46% 41.57% 43.11%

Public Service Company of New Mexico PNM 54.37% 53.89% 54.14% 52.57% 53.74%

Texas-New Mexico Power Company PNM 40.52% 40.71% 41.07% 41.51% 40.95%

Kansas Gas and Electric Company WR 27.57% 27.85% 28.01% 27.35% 27.69%

Westar Energy (KPL) WR 37.24% 39.06% 40.52% 40.74% 39.39%

Source: SNL Financial

Northern States Power Company Page 1 of 3

Docket No. E002/GR-15-826

Exhibit___(JMC-1), Appendix A

Case DescriptionAddressed in

2016 TY Case

12-961 DOC 201 Please provide the list of companies that were included in the Value Line universe of electric utilities. For each

company that was eliminated based on the screens used by Mr. Coyne, please indicate which screening criteria it

failed to meet.

Appendix A

IR No.

Return on Equity Prefiled Discovery - 2016 TY Minnesota Electric Rate Case

Index

Northern States Power Company Page 2 of 3 Docket No. E002/GR-15-826

Exhibit___(JMC -1), Appendix A

Docket No. E002/GR-12-961 Information Request No. DOC-201 __________________________________________________________________

Question:

Reference: Company witness Mr. James M. Coyne’s Direct Testimony

Please provide the list of companies that were included in the Value Line universe of electric utilities. For each company that was eliminated based on the screens used by Mr. Coyne, please indicate which screening criteria it failed to meet.

Response:

Please see Attachment A to this response for the requested information.

__________________________________________________________________

Witness: James M. Coyne

Preparer: John Trogonoski 161 Worcester Road | Suite 503 | Framingham, MA 01701direct 508.202.7921

Title: Senior Project Manager

Department: Concentric Energy Advisors

Northern States Power Company


Credit

Rating

Pays

Dividends

Covered by

More Than

One Analyst

Positive Growth

Rates from at

least two sources

(Value Line, First

Call, and Zacks)

Generation

Assets

Included in

Rate Base

Company-

Owned

Generation >

50% of MWh

Sales to

Ultimate

Customers

% Regulated

Revenue >

60%

% Regulated

Operating

Income >

60%

% Regulated

Electric

Revenue >

80%

% Regulated

Electric

Operating

Income >

80%

Not a Party

to a

Merger/Signi

ficant

Transaction

NSPM Proxy

Company

ALLETE, Inc. ALE




Avista Corporation AVA

Black Hills Corporation BKH

CenterPoint Energy, Inc. CNP

Cleco Corporation CNL

CMS Energy Corporation CMS

Consolidated Edison, Inc. ED

Dominion Resources, Inc. D

DTE Energy Company DTE


Edison International EIX



Entergy Corporation ETR

Eversource Energy ES

Exelon Corporation EXC

FirstEnergy Corporation FE


Hawaiian Electric Industries, Inc. HE

IDACORP, Inc. IDA

ITC Holdings Corporation ITC

MGE Energy, Inc. MGEE

NextEra Energy, Inc. NEE

NorthWestern Corporation NWE


Otter Tail Corporation OTTR

Pepco Holdings, Inc. POM

PG&E Corporation PCG

Pinnacle West Capital Corporation PNW


Portland General Electric Company POR

PPL Corporation PPL

Public Service Enterprise Group Inc. PEG

SCANA Corporation SCG

Sempra Energy SRE

Southern Company SO

TECO Energy, Inc. TE

UIL Holdings Corporation UIL

Vectren Corporation VVC


Wisconsin Energy Corporation WEC

Xcel Energy Inc. XEL

Electric Proxy Group - Screening Criteria


Exhibit___(JMC-1), Appendix A

Information Request No. DOC-201, Attachment A, Page 1 of 1

Page 3 of 3

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