2018 Capitalization Rate Study Tax Rule 8 (g) (2) provides the authority for the method in which the capitalization rates were developed in this study. The rule states “the capitalization

____________________________________________________________________________________________________________

__________________________________________________________________________________________________________________________________________________________________________________________________

2018 Capitalization Rate Study

State-Assessed Properties Division Richard Reisinger, Chief

Lien Date 2018

BOARD MEMBERS SEN. GEORGE RUNNER (Ret.) First District

FIONA MA, CPA Second District

JEROME E. HORTON Third District

DIANE L. HARKEY Fourth District

BETTY T. YEE State Controller

DEAN R. KINNEE Executive Director

Lancaster San Francisco Los Angeles County Orange County

CALIFORNIA STATE BOARD OF EQUALIZATION

10AM 12PM 2PM 4PM

14.80

14.60

14.40

14.20

14.00

Executive Summary

The income approach to value includes any method of converting an income stream into a present value estimate (i.e., an indicator of current fair market value). The income approach is also called the capitalization approach because capitalization is the process of converting an expected income into an indicator of value.

The methods or techniques used in the income approach may be relatively simple (e.g., income or rent multipliers and direct capitalization), or more complex (e.g., various yield capitalization techniques). All of these methods are referred to as capitalization techniques because they convert an expected future income stream into a present value estimate.

The income approach requires careful application because small variations in its key variables (capitalization rate, duration of income stream, estimated income and expenses, etc.) will be mathematically leveraged into a wide range of estimated value. This is particularly true for the capitalization rate variable. The reliability of the income approach is no greater than the validity of the assumptions used to estimate the key variables. The mathematical techniques used in the approach, while sometimes complicated, are merely tools for converting these assumptions into an estimate of current market value.1

I. Authority for Capitalization Rate Study

Property Tax Rule 8 (g) (2) provides the authority for the method in which the capitalization rates were developed in this study. The rule states the capitalization rate may be developed

By deriving a weighted average of the capitalization rates for debt and for equity capital appropriate to the California money markets (the band-of-investment method) and adding increments for expenses that are excluded from outgo because they are based on the value that is being sought or the income that is being capitalized. The appraiser shall weight the rates for debt and equity capital by the respective amounts of such capital he deems most likely to be employed by prospective purchasers.

II. Band of Investment Approach

In its simplest form, the band of investment method assumes that a purchaser would pay cash (or equity) for a portion of the property and would borrow the balance of the purchase price. For example:

Debt 30% x Cost of Debt 7% = 2.1% Equity 70% x Cost of Equity 12% = 8.4% Weighted Average Cost of Capital 10.5%

1 Assessors Handbook 501, Basic Appraisal, Revised January 2002

i

Executive Summary

This booklet contains a study for each of the major state assessee industry groups2 in California. Industry data was compiled by groups with similar Value Line financial ratings. Local exchange, wireless and interexchange industries have been combined into one telecommunications study.

Generally accepted procedures were used to estimate the cost of capital for debt and equity. The long term debt cost is the cost for a particular risk class of debt on the lien date. The equity rate reflects the rate of return or compensation that will satisfy the risk that a prospective purchaser would anticipate if a property purchase decision was made. The rates chosen are the result of analysis of economic conditions and financial data listed in the supporting schedules and are the product of the staffs informed judgment.

The rates derived in this study are basic capitalization (or discount) rates that represent the after-tax return on investment only. Any increments required to be added by Property Tax Rule 8(g)(2), such as income or ad valorem tax components, are in addition to the rates listed.

A. Capital Structure - Prospective Purchaser vs. Company Specific

State assessees often ask why the Board does not use the current capital structure of individual companies in the band-of-investment method. As explained in Rule 8 (g)(2), the appraiser shall weight the rates of debt and equity capital by the respective amounts of such capital deemed most likely to be employed by a prospective purchaser.

Therefore, the capital structure contemplated is a representative or typical structure of an industry group of companies with a similar bond rating, not that of the present owner. The objective of doing so is to strike an optimum capital structure from the perspective of a potential investor.

B. Company Specific Debt Rates

In many cases the debt component of the capital structure for a prospective purchaser and the individual company being assessed may be similar. In cases where, in the judgement of staff, the debt ratings of the individual companies being assessed and the debt ratings of prospective purchasers are similar, the company-specific bond rating has been used to develop the appropriate debt component of the recommended capitalization rate. In cases where rate-base regulated companies have embedded debt with rates higher than the market rates at the lien date, a revenue adjustment may be indicated in order to match the revenue expected by a prospective purchaser if the purhasers revenue would be determined by those market rates.

2 Gas, Electric & Water; Natural Gas Transmission; Electric Generation; Telecommunications (Local Exchange, Interexchange, Wireless); Pipeline; Railroad

ii

Executive Summary

C. Impact of Holding Companies on Determination of Capital Structure

Many of the larger state assessees are subsidiaries of their holding company. Stock purchases related to a subsidiary must be made through the parent holding company. Since there is no direct market data for state assessees that are subsidiaries of a holding company, staff must rely, in great part, upon market data related to the holding company.

III. Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM) is a widely accepted theory used to estimate the cost of equity capital. In the application of CAPM, the most sensitive component affecting the outcome is the estimate of the beta3 coefficient. The choice of different time frames and frequencies of measurement in the calculation of the beta can produce significantly different results. Another factor in the use of beta is the choice of whether to use an unadjusted beta or a beta adjusted to reflect the fact that betas tend to revert to the mean over time. In this study, three betas were obtained from separate sources: one adjusted (Value Line) and two unadjusted. Generally the betas from the three sources are averaged to establish the beta used to estimate the cost of equity capital for a specific industry. However, the average beta for highly regulated industries, such as gas or electric transmission and distribution, tend to understate the risk inherent in those securities. Accordingly, for companies in highly regulated environments, the Value Line adjusted beta was chosen as a better estimate of the relative risk in the calculation of the required equity return.

IV. Flotation Costs

When new issues of both debt and equity capital are sold to investors, the issuing company incurs transaction costs such as underwriting fees, legal expenses, and prospectus preparation costs. These costs of issuing securities are known as flotation costs. Much like loan fees or points on a mortgage, flotation costs effectively reduce the net proceeds that a firm will receive from issuing securities. The cost of capital is adjusted upward to reflect the expected flotation costs incurred to issue securities. Since the flotation costs are reflected in the weighted average cost of capital, the flotation costs should not be allowed as expenses in projecting cash flows to be capitalized. Each basic capitalization rate in this study has been adjusted to reflect flotation costs.

V. Utilization of Other Studies and Data

Staff appraisers reviewed data and capitalization rate studies submitted by assessees and interested parties in addition to a review of recent regulatory rate case filings and decisions, and where appropriate, used this information in the development of the staff derived rates.

The capitalization rates published in this study are intended to be applied to the unitary operations of the companies subject to assessment by the California State Board of Equalization.

3 The covariance of the returns of a security regressed against the returns of the overall market - a measurement of relative volatility

iii

California State Board of Equalization State-Assessed Properties Division 2018 Capitalization Rate Study

Gas, Electric and Water Companies

SBE No. Company Name

Ratings Capital Structure Rates of Return Basic Cap Rate Financial

Preferred Stock Bond

Common Equity

Preferred Stock Debt

Common Equity


Gas and Electric Companies 141 San Diego Gas & Electric Company148 Southern California Edison Company135 Pacific Gas and Electric Company106 PacifiCorp 125 Terra-Gen Dixie Valley, LLC 146 Sierra Pacific Power Company

119 Trans Bay Cable LLC 156 DATC Path 15, LLC 163 Liberty Utilities (Calpeco Electric), LLC 191 Arizona Public Service Company

Electric Cooperatives

Natural Gas Companies 149 Southern California Gas Company152 Southwest Gas Corporation192 Alpine Natural Gas Operating Company No. One LLC 194 West Coast Gas Company, Inc.

104 Central Valley Gas Storage LLC 121 Gill Ranch Storage, LLC 195 Wild Goose Storage, LLC 198 Lodi Gas Storage, LLC

Water Company 101 Golden State Water Company

A A B

Not Rated Not Rated Not Rated

Not Rated Not Rated Not Rated Not Rated

Not Rated

A B++ Not Rated Not Rated


A

A3 Baa1 Baa1 Baa2

Not Rated

A3

A1 A2 A2 A3

Not Rated Baa1

Not Rated A3

Not Rated A2

Not Rated

A1 A3

Not Rated Not Rated


A2

52% 48% 52% 52% 55% 52%

55% 55% 55% 55%

55%

52% 55% 55% 55%

60% 60% 60% 60%

55%

3% 9% 1% 1%

1%

2%

45% 43% 47% 47% 45% 47%

45% 45% 45% 45%

45%

46% 45% 45% 45%

40% 40% 40% 40%

45%

10.63% 10.73% 10.68% 11.46% 11.46% 11.46%

14.06% 14.06% 11.46% 11.46%

11.46%

10.47% 10.52% 12.76% 12.76%

15.10% 15.10% 15.10% 15.10%

9.82%

6.31% 6.31% 6.31% 6.31%

7.03%

6.09%

3.96% 4.02% 4.14% 4.14% 4.14% 4.25%

4.14% 4.14% 4.14% 4.14%

4.14%

3.96% 4.14% 4.51% 4.51%

5.50% 5.50% 5.50% 5.50%

3.87%

7.49% 7.45% 7.56% 7.97% 8.16% 8.03%

9.60% 9.60% 8.16% 8.16%

8.16%

7.39% 7.65% 9.05% 9.05%

11.26% 11.26% 11.26% 11.26%

7.14%

Page 1

Ratings Capital Structure Rates of Return Basic Cap Common Common

SBE No. Company Name Financial Bond Equity Debt Equity Debt Rate

153 Transwestern Pipeline Company Not Rated Not Rated 70% 30% 13.54% 4.16% 10.73%

180 North Baja Pipeline, LLC Not Rated Not Rated 70% 30% 13.54% 4.16% 10.73%

187 Mojave Pipeline Company, LLC Not Rated Not Rated 70% 30% 13.54% 4.16% 10.73%

188 Kern River Gas Transmission Company Not Rated Not Rated 70% 30% 13.54% 4.16% 10.73%

189 Standard Pacific Gas Line, Incorporated Not Rated Not Rated 70% 30% 13.54% 4.16% 10.73%

190 Tuscarora Gas Transmission Company Not Rated Not Rated 70% 30% 13.54% 4.16% 10.73%

196 Questar Southern Trails Pipeline Company Not Rated Not Rated 70% 30% 13.54% 4.16% 10.73%

197 El Paso Natural Gas Company, LLC Not Rated Not Rated 70% 30% 13.54% 4.16% 10.73%


Natural Gas Transmission Companies

Page 2

Facility Type

Ratings Capital Structure Rates of Return Basic Cap

3RateFinancial Bond Common Equity Debt

Common Equity Debt

Modern Electric Generation Technology

2 Older Electric Generation Technology

1 B

B

B2

B2

65%

65%

35%

35%

14.84%

16.93%

6.35%

7.36%

11.87%

13.58%

California State Board of Equalization State-Assessed Properties Division 2018 Capitalization Rate Study Electric Generation Facilities

1 Modern Electric Generation Technology - Generally high efficiency combined-cycle or simple cycle gas turbine electric generation facilities incorporating contemporary generation technologies. 2 Older Electric Generation Technology - Generally older steam turbine electric generation facilities that were sold off by vertically integrated electric utilities and for which no replacements, other than for routine maintenance, have been made.

3 Staff may adjust the rates stated above if the specific situation of a facility warrants an adjustment to its basic capitalization rate.

Page 3


Ratings Capital Structure Rates of Return Basic Cap Rate Financial Bond

Common Equity Debt

Common Equity Debt

Local Exchange Companies 279 Pacific Bell Telephone Company294 Consolidated Communications of California Company284 Citizens Telecommunications Company of California, Inc.201 Frontier California, Inc.

Other Local Exchange Companies

Wireless Companies 2532 Los Angeles SMSA Ltd., Partnership 2552 Fresno MSA Limited Partnership 2559 Cellco Partnership 2606 AT&T Mobility LLC 2669 California RSA #4 Partnership 2748 T-Mobile West, LLC 2720 Sprint Telephony PCS, L.P.

1 Other Wireless Companies

Wireless Reseller Companies

Interexchange Companies 2274 MCI Communications Services, Inc. 2310 AT&T Communications 2372 MCI Metro Access Transmission Services, LLC 2463 CenturyLink Communications, LLC 2014 Sprint Communications Company, L.P.

Other Interexchange Carriers

Other Interexchange Resellers

1 Includes Radio Telephone and Paging Companies

A++ C++ C C

Not Rated

A++ A++ A++ A++ A++ B+ C++

Not Rated

Not Rated

A++ A++ A++ B C++

Not Rated

Not Rated

Baa1 B1 B3 B3

Not Rated

Baa1 Baa1 Baa1 Baa1 Baa1 Ba2 B1

Not Rated

Not Rated

Baa1 Baa1 Baa1 Ba3 B1

Not Rated

Not Rated

70% 65% 65% 65%

65%

70% 70% 70% 70% 70% 65% 65%

55%

55%

70% 70% 70% 65% 60%

55%

55%

30% 35% 35% 35%

35%

30% 30% 30% 30% 30% 35% 35%

45%

45%

30% 30% 30% 35% 40%

45%

45%

11.15% 15.36% 15.36% 15.36%

15.73%

10.57% 10.57% 10.57% 10.57% 10.57% 12.76% 14.58%

16.67%

18.75%

11.93% 11.93% 11.93% 14.58% 16.67%

21.35%

24.48%

4.05% 6.01% 6.01% 6.01%

6.26%

4.05% 4.05% 4.05% 4.05% 4.05% 5.22% 5.48%

7.53%

8.04%

4.05% 4.05% 4.05% 4.95% 5.48%

7.53%

8.04%

9.02% 12.09% 12.09% 12.09% 12.42%

8.62% 8.62% 8.62% 8.62% 8.62% 10.12% 11.40%

12.56%

13.93%

9.56% 9.56% 9.56% 11.21% 12.19%

15.13%

17.08%


Telecommunications Companies

Page 4

Ratings Capital Structure Rates of Return Basic Cap Common

SBE No. Company Name Financial Bond Equity Debt Equity Debt Rate

402 Calnev Pipe Line LLC NR-1 NR-b 65% 35% 13.80% 4.23% 10.45% 461 SFPP, L.P. NR-1 NR-b 65% 35% 13.80% 4.23% 10.45%

480 Phillips 66 Pipeline LLC NR-2 NR-b 65% 35% 14.32% 4.23% 10.79% 486 Pacific Pipeline System, LLC NR-2 NR-b 65% 35% 14.32% 4.23% 10.79% 492 San Pablo Bay Pipeline Company LLC NR-2 NR-b 65% 35% 14.32% 4.23% 10.79%

Other Pipeline Companies NR-3 NR-c 65% 35% 15.36% 5.25% 11.82%

California State Board of Equalization State-Assessed Properties Division 2018 Capitalization Rate Study Pipeline Companies

Page 5

SBE No.

Company Name


Common Equity Debt

Common Equity Debt

804 843

802 810 813 822 826 850 865 878 882 897 899

BNSF Railway CompanyUnion Pacific Railroad Company

Central Oregon & Pacific Railroad California Northern Railroad Pacific Harbor Lines Pacific Sun Railroad, LLC Sacramento Valley Railroad, LLC Modesto & Empire Traction Company San Diego & Imperial Valley Railroad Co. Inc. Stockton Terminal and Eastern Railway Trona Railway Company, LLC San Joaquin Valley Railroad Company Arizona & California Railroad Company

Other Railroad Companies

A++ A++

NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1

NR-2

Baa2 Baa2

NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1 NR-1

NR-2

85% 85%

65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65%

65%

15% 15%

35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35%

35%

13.02% 13.02%

15.10% 15.10% 15.10% 15.10% 15.10% 15.10% 15.10% 15.10% 15.10% 15.10% 15.10%

15.36%

4.23% 4.23%

5.76% 5.76% 5.76% 5.76% 5.76% 5.76% 5.76% 5.76% 5.76% 5.76% 5.76%

6.77%

11.70% 11.70%

11.83% 11.83% 11.83% 11.83% 11.83% 11.83% 11.83% 11.83% 11.83% 11.83% 11.83%

12.36%

California State Board of Equalization State-Assessed Properties Division 2018 Capitalization Rate Study Railroad Companies

Page 6


Gas, Electric and Water Companies


Ratings Capital Structure Rates of Return Basic Cap Rate Financial

Preferred Stock Bond

Common Equity


Common Equity


Gas and Electric Companies 141 San Diego Gas & Electric Company148 Southern California Edison Company135 Pacific Gas and Electric Company106 PacifiCorp 125 Terra-Gen Dixie Valley, LLC 146 Sierra Pacific Power Company

119 Trans Bay Cable LLC 156 DATC Path 15, LLC 163 Liberty Utilities (Calpeco Electric), LLC 191 Arizona Public Service Company

Electric Cooperatives

Natural Gas Companies 149 Southern California Gas Company152 Southwest Gas Corporation192 Alpine Natural Gas Operating Company No. One LLC 194 West Coast Gas Company, Inc.

104 Central Valley Gas Storage LLC 121 Gill Ranch Storage, LLC 195 Wild Goose Storage, LLC 198 Lodi Gas Storage, LLC

Water Company 101 Golden State Water Company

A A B

Not Rated Not Rated Not Rated


Not Rated

A B++ Not Rated Not Rated


A

A3 Baa1 Baa1 Baa2

Not Rated

A3

A1 A2 A2 A3

Not Rated Baa1

Not Rated A3

Not Rated A2

Not Rated

A1 A3

Not Rated Not Rated


A2

52% 48% 52% 52% 55% 52%

55% 55% 55% 55%

55%

52% 55% 55% 55%

60% 60% 60% 60%

55%

3% 9% 1% 1%

1%

2%

45% 43% 47% 47% 45% 47%

45% 45% 45% 45%

45%

46% 45% 45% 45%

40% 40% 40% 40%

45%

10.63% 10.73% 10.68% 11.46% 11.46% 11.46%

14.06% 14.06% 11.46% 11.46%

11.46%

10.47% 10.52% 12.76% 12.76%

15.10% 15.10% 15.10% 15.10%

9.82%

6.31% 6.31% 6.31% 6.31%

7.03%

6.09%

3.96% 4.02% 4.14% 4.14% 4.14% 4.25%

4.14% 4.14% 4.14% 4.14%

4.14%

3.96% 4.14% 4.51% 4.51%

5.50% 5.50% 5.50% 5.50%

3.87%

7.49% 7.45% 7.56% 7.97% 8.16% 8.03%

9.60% 9.60% 8.16% 8.16%

8.16%

7.39% 7.65% 9.05% 9.05%

11.26% 11.26% 11.26% 11.26%

7.14%

Page 7

2018 Capitalization Rate Study Gas, Electric and Water Companies

Industry Notes

In establishing the capital structures for the rate-regulated utilities, staff considered the decisions of the California Public Utilities Commission (CPUC). For the non-rate-regulated utilities, the capital structures were developed based on the financial data collected and the relative risks of the utilities sampled in the Capitalization Rate Study.

Staff considered the following in the development of equity rates: 1. CPUC-authorized rates of return 2. Discounted Cash Flow Model 3. Capital Asset Pricing Model Ex Post and Ex Ante risk premiums

Staff considered the following in the development of debt rates: 1. Moodys Utility Bond Yield Spreads 2. The debt rates that a prospective purchaser would expect at lien date

Empire District Electric Company was removed from the 2018 Capitalization Rate Study sample due to lack of financial data.

Due to a tax rate change in accordance with the Tax Cuts and Job Act of 2017, the prospective purchasers tax rate used to relever betas has changed from 40% to 28%.

Page 8

2018 Capitalization Rate Study Gas and Electric Companies Flotation Cost Adjustment

Equity Preferred Stock Debt Value Line Rating

Recommended Rate

Flotation Cost in %

Adjusted Rate

Moody's Rating

Recommended Rate

Flotation Cost in %

Adjusted Rate

Moody's Rating

Recommended Rate

Flotation Cost in %

Adjusted Rate

A 10.20% 4.00% 10.63% A3 6.22% 1.50% 6.31% A1 3.90% 1.50% 3.96%

A 10.30% 4.00% 10.73% Baa1 6.22% 1.50% 6.31% A2 3.96% 1.50% 4.02%

B 10.25% 4.00% 10.68% Baa1 6.22% 1.50% 6.31% A3 4.07% 1.50% 4.14%

Not Rated 11.00% 4.00% 11.46% Not Rated 6.92% 1.50% 7.03% Baa1 4.19% 1.50% 4.25%

Not Rated 13.50% 4.00% 14.06% Not Rated 4.44% 1.50% 4.51%

Cost of Capital Adjusted for Flotation Costs = ku 1 - f

Where: ku = The cost of capital unadjusted for flotation costs

f = Flotation cost as a percentage of the value of securities issued

Page 9

Common Equity Preferred Stock Bonds Value Line Rating

Rate of 1 Return

Moody's Bond Rating

Rate of 2 Return

Moody's Bond Yields

Moody's Rating

Rate of 3 Return

A

A

B

Not Rated

Not Rated

10.20%

10.30%

10.25%

11.00%

13.50%

A3

Baa1

Baa1

Not Rated

6.22%

6.22%

6.22%

6.92%

Aa

A

Baa

Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Not Rated

3.57% 3.63% 3.70% 3.76% 3.87% 3.99% 4.10% 4.24% 4.38% 4.52% 4.66% 4.80% 4.94% 5.08% 5.22%

2018 Capitalization Rate Study Gas and Electric Companies

Summary of Rates of Return

1 The Rate of Return on Common Equity was developed by staff based on the relative risks of the utilities in conjunction with the results of various financial models and pertinent information from different sources. Consideration was also given to the latest decision of the California Public Utilities Commission (D.17-07-005). For 2018, the return on equity (ROE) and return on rate base (ROR) for Pacific Gas and Electric Company are 10.25% and 7.69%, respectively; for Southern California Edison Company, the ROE and ROR are 10.30% and 7.61%, respectively; for San Diego Gas & Electric Company, the ROE and ROR are 10.20% and 7.55%, respectively.

2 The Rate of Return on Preferred Stocks was developed by staff based on the relative risks of the utilities. Consideration was given to the latest decisions of the California Public Utilities Commission.

3 The Rates of Return on Bonds were based on the 2017 Moody's "Utility Bond Yields" reports. Because Moody's assigns yields only to groups Aaa, Aa, A and Baa, staff interpolated the difference between these groups to further refine the ratings.

Page 10


Capital Asset Pricing Model - Ex Ante

Component Value Line Ratings

A+, A B++, B+, B

Expected Future Return, S&P 500 Less: Risk Free Return - Long-Term Treasury Rates 1

11.29% 2.65%

11.29% 2.65%

Risk Premium Beta 2

8.64% 0.78

8.64% 0.80

Adjusted Risk Premium Risk Free Return - Long-Term Treasury Rates 1

6.71% 2.65%

6.91% 2.65%

Projected Return on Equity 9.36% 9.56%

1 US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 29, 2017 2 The betas are based on staff's judgement in conjunction with the results from the beta analysis of the study sample.

Page 11


Capital Asset Pricing Model - Ex Post


A+, A B++, B+, B

Common Stock Return, S&P 500 (1928 - 2017) 1

Less: Return on 10 Year Treasury Bonds (1928 - 2017) 1 11.53% 5.15%

11.53% 5.15%

Risk Premium Beta 2

6.38% 0.78

6.38% 0.80


4.95% 2.65%

5.10% 2.65%


1 Damodaran Online, January 5, 2018 2 The betas are based on staff's judgement in conjunction with the results from the beta analysis of the study sample. 3 US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 29, 2017

Page 12


Equity Rates

a b c d e f g h i j k l m Stock Est. Est. Dividend Est. Est. E/P DvYld+ DvYld+

Value Line Company Price 2018 2017 2017 2018 Yield Dividend Earnings Ratio DvGrth ErngsGr Rating Name 12/29/17 Earnings Earnings Dividends Dividends (g/c) Growth Growth (d/c) (h+i) (h+j)

A+ American Electric Power Co., Inc. 73.57 3.85 3.60 2.39 2.51 3.41% 5.00% 3.87% 5.23% 8.41% 7.28% A+ Consolidated Edison, Inc. 84.95 4.20 4.05 2.76 2.84 3.34% 3.00% 2.57% 4.94% 6.34% 5.91% A+ Pinnacle West Capital Corporation 84.43 4.40 4.30 2.70 2.86 3.39% 5.50% 4.70% 5.21% 8.89% 8.09% A+ WEC Energy Group, Inc. 66.43 3.30 3.12 2.08 2.21 3.33% 6.50% 5.57% 4.97% 9.83% 8.89% A+ Xcel Energy Inc. 48.11 2.40 2.15 1.44 1.52 3.16% 6.00% 5.33% 4.99% 9.16% 8.49% A ALLETE, Inc. 74.36 3.55 3.35 2.14 2.22 2.99% 4.50% 6.10% 4.77% 7.49% 9.09% A Alliant Energy Corporation 42.25 2.10 1.90 1.26 1.34 3.17% 4.50% 6.17% 4.97% 7.67% 9.34% A Ameren Corporation 58.99 3.05 2.75 1.78 1.85 3.14% 4.50% 6.70% 5.17% 7.64% 9.84% A Avista Corporation 51.49 1.95 1.80 1.43 1.49 2.89% 4.00% 4.00% 3.79% 6.89% 6.89% A Black Hills Corporation 60.11 3.50 3.30 1.81 1.90 3.16% 6.00% 5.43% 5.82% 9.16% 8.59% A Duke Energy Corporation 84.11 4.80 4.30 3.49 3.64 4.33% 4.50% 3.90% 5.71% 8.83% 8.23% A Edison International 63.24 4.40 4.35 2.23 2.45 3.87% 9.00% 4.73% 6.96% 12.87% 8.61% A Eversource Energy 63.18 3.30 3.10 1.90 2.02 3.20% 6.00% 6.13% 5.22% 9.20% 9.33% A Hawaiian Electric Industries, Inc. 36.15 1.80 1.50 1.24 1.24 3.43% 2.00% 4.27% 4.98% 5.43% 7.70% A MGE Energy, Inc. 63.10 2.40 2.22 1.26 1.32 2.09% 4.50% 6.50% 3.80% 6.59% 8.59% A NextEra Energy, Inc. 156.19 7.05 6.70 3.93 4.44 2.84% 9.50% 7.47% 4.51% 12.34% 10.31% A OGE Energy Corp. 32.58 2.05 1.90 1.27 1.40 4.30% 9.00% 5.10% 6.29% 13.30% 9.40% A Otter Tail Corporation 44.45 1.90 1.80 1.28 1.30 2.92% 2.00% 7.00% 4.27% 4.92% 9.92% A Sempra Energy 106.92 5.30 3.60 3.29 3.56 3.33% 8.50% 8.77% 4.96% 11.83% 12.10% A The Southern Company 48.09 3.05 3.00 2.30 2.38 4.95% 3.50% 3.43% 6.34% 8.45% 8.38% A Vectren Corporation 65.02 2.80 2.65 1.71 1.83 2.81% 5.50% 6.25% 4.31% 8.31% 9.06% A Westar Energy, Inc. 52.80 2.60 2.45 1.60 1.68 3.18% 5.00% 4.07% 4.92% 8.18% 7.25%

Mean 3.33% 5.39% 5.37% 5.10% 8.72% 8.69% Median 3.19% 5.00% 5.38% 4.97% 8.43% 8.60% Weighted Average 9.51% 8.78%

Sources: Columns a, d, e, f, g, and i were extracted from Value Line. Column c was extracted from Finance.Yahoo.com and represents December 29, 2017 closing stock prices. Column j represents the average estimated earnings growth extracted from Value Line, Zacks.com, and ThomsonReuters.com.

Page 13

http:ThomsonReuters.comhttp:Zacks.comhttp:Finance.Yahoo.com


Equity Rates



B++ CMS Energy Corporation 47.30 2.30 2.15 1.33 1.42 3.00% 6.50% 6.77% 4.86% 9.50% 9.77% B++ DTE Energy Company 109.46 5.75 6.00 3.36 3.59 3.28% 7.00% 5.63% 5.25% 10.28% 8.91% B++ El Paso Electric Company 55.35 2.65 2.40 1.32 1.42 2.57% 7.00% 5.17% 4.79% 9.57% 7.73% B++ Entergy Corporation 81.39 4.85 6.70 3.50 3.58 4.40% 2.00% -0.30% 5.96% 6.40% 4.10% B++ Exelon Corporation 39.41 2.75 2.65 1.31 1.34 3.40% 5.50% 4.37% 6.98% 8.90% 7.77% B++ Portland General Electric Company 45.58 2.40 2.30 1.34 1.42 3.12% 6.00% 4.53% 5.27% 9.12% 7.65% B+ CenterPoint Energy, Inc. 28.36 1.40 1.40 1.07 1.11 3.91% 3.50% 6.57% 4.94% 7.41% 10.48% B+ FirstEnergy Corp. 30.27 2.80 2.60 1.44 1.44 4.76% 2.00% 2.35% 9.25% 6.76% 7.11% B+ Great Plains Energy Incorporated 32.24 1.25 -0.10 1.10 1.18 3.66% 5.00% 5.17% 3.88% 8.66% 8.83% B+ PNM Resources, Inc. 40.15 1.70 1.90 0.99 1.09 2.71% 9.00% 6.47% 4.23% 11.71% 9.18% B+ SCANA Corporation 39.78 4.15 4.05 2.45 2.45 6.16% 3.00% 3.50% 10.43% 9.16% 9.66% B PG&E Corporation 44.83 3.75 3.70 2.08 0.00 0.00% 3.00% 4.93% 8.36% 3.00% 4.93%



Page 14



Long Term Earnings Growth

a b c d e f Value Line Rating Company Name Value Line Zacks Thomson Average

A+ American Electric Power Co., Inc. 4.00% 4.80% 2.80% 3.87% A+ Consolidated Edison, Inc. 2.50% 2.00% 3.20% 2.57% A+ Pinnacle West Capital Corporation 5.50% 3.20% 5.40% 4.70% A+ WEC Energy Group, Inc. 6.00% 5.40% 5.30% 5.57% A+ Xcel Energy Inc. 4.50% 5.50% 6.00% 5.33% A ALLETE, Inc. 5.00% 7.20% N/A 6.10% A Alliant Energy Corporation 6.00% 5.40% 7.10% 6.17% A Ameren Corporation 6.00% 7.10% 7.00% 6.70% A Avista Corporation 4.00% N/A N/A 4.00% A Black Hills Corporation 7.50% 4.70% 4.10% 5.43% A Duke Energy Corporation 4.50% 4.00% 3.20% 3.90% A Edison International 4.00% 6.40% 3.80% 4.73% A Eversource Energy 6.50% 6.00% 5.90% 6.13% A Hawaiian Electric Industries, Inc. 1.50% 5.10% 6.20% 4.27% A MGE Energy, Inc. 6.50% N/A N/A 6.50% A NextEra Energy, Inc. 7.00% 7.40% 8.00% 7.47% A OGE Energy Corp. 6.00% 5.40% 3.90% 5.10% A Otter Tail Corporation 7.00% N/A N/A 7.00% A Sempra Energy 7.50% 8.90% 9.90% 8.77% A The Southern Company 3.50% 4.50% 2.30% 3.43% A Vectren Corporation 6.50% 6.00% N/A 6.25% A Westar Energy, Inc. 6.00% 3.40% 2.80% 4.07%

Sources: Columns a and c were extracted from Value Line. Column d was extracted from Zacks.com. Column e was extracted from ThomsonReuters.com.

Page 15

http:ThomsonReuters.comhttp:Zacks.com



a b c d e f

Value Line Rating Company Name Value Line Zacks Thomson Average

B++ B++ B++ B++ B++ B++ B+ B+ B+ B+ B+ B

CMS Energy Corporation DTE Energy Company El Paso Electric Company Entergy Corporation Exelon Corporation Portland General Electric Company CenterPoint Energy, Inc. FirstEnergy Corp. Great Plains Energy Incorporated PNM Resources, Inc. SCANA Corporation PG&E Corporation

6.50% 6.00% 5.00% -2.50% 8.50% 6.00% 6.00% 12.00% 4.50% 7.50% 3.50% 8.50%

6.40% 6.00% 5.20% 7.00% 4.30% 3.60% 6.00% N/A

5.00% 5.80% 3.50% 4.20%

7.40% 4.90% 5.30% -5.40% 0.30% 4.00% 7.70% -7.30% 6.00% 6.10% N/A

2.10%

6.77% 5.63% 5.17% -0.30% 4.37% 4.53% 6.57% 2.35% 5.17% 6.47% 3.50% 4.93%

Mean 5.56% 5.31% 4.21% 5.09% Median 6.00% 5.40% 5.10% 5.17% Weighted Average 4.88%


Page 16


2018 Capitalization Rate Study Gas and Electric Companies Capital Structure

a b c Common

d Common

e Mkt Value

f L.T.

g Pfd

h Common

i Total

j L.T.

k Pfd

lCommon

Value Line Rating

CompanyName

Stock Outstanding

Stock Price 12/29/17

Equity ($million)

Debt Stock Equity ($million) ($million) ($million)

Capital ($million)

Debt %

Stock %

Equity %

A+ A+ A+ A+ A+ A A A A A A A A A A A A A A A A A

American Electric Power Co., Inc. Consolidated Edison, Inc. Pinnacle West Capital Corporation WEC Energy Group, Inc. Xcel Energy Inc. ALLETE, Inc. Alliant Energy Corporation Ameren Corporation Avista Corporation Black Hills Corporation Duke Energy Corporation Edison International Eversource Energy Hawaiian Electric Industries, Inc. MGE Energy, Inc. NextEra Energy, Inc. OGE Energy Corp. Otter Tail Corporation Sempra Energy The Southern Company Vectren Corporation Westar Energy, Inc.

491,883,887 310,068,797 111,729,775 315,575,562 507,762,881 51,039,658 231,204,360 242,634,798 64,415,157 53,484,560 699,975,614 325,811,206 316,885,808 108,785,978 34,668,370 470,397,581 199,705,254 39,557,491 251,277,393 1,003,627,691 83,002,391 142,094,176

73.57 84.95 84.43 66.43 48.11 74.36 42.25 58.99 51.49 60.11 84.11 63.24 63.18 36.15 63.10 156.19 32.58 44.45

106.92 48.09 65.02 52.80

36,187.90 26,340.34 9,433.34 20,963.68 24,428.47 3,795.31 9,768.38 14,313.03 3,316.74 3,214.96 58,874.95 20,604.30 20,020.85 3,932.61 2,187.57 73,471.40 6,506.40 1,758.33 26,866.58 48,264.46 5,396.82 7,502.57

18,362.00 0.00 14,651.00 0.00 4,491.00 0.00 8,785.80 30.40 14,573.00 0.00 1,444.60 0.00 4,255.10 400.00 6,922.00 142.00 1,543.30 0.00 3,109.90 0.00 48,929.00 0.00 11,638.00 2,654.00 10,468.00 155.60 1,493.50 34.30 389.40 0.00

30,345.00 0.00 2,749.50 0.00 490.40 0.00

14,803.00 20.00 44,042.00 2,218.00 1,639.10 0.00 3,686.90 0.00

36,187.90 54,549.90 26,340.34 40,991.34 9,433.34 13,924.34 20,963.68 29,779.88 24,428.47 39,001.47 3,795.31 5,239.91 9,768.38 14,423.48 14,313.03 21,377.03 3,316.74 4,860.04 3,214.96 6,324.86 58,874.95 107,803.95 20,604.30 34,896.30 20,020.85 30,644.45 3,932.61 5,460.41 2,187.57 2,576.97 73,471.40 103,816.40 6,506.40 9,255.90 1,758.33 2,248.73 26,866.58 41,689.58 48,264.46 94,524.46 5,396.82 7,035.92 7,502.57 11,189.47

33.66% 35.74% 32.25% 29.50% 37.37% 27.57% 29.50% 32.38% 31.75% 49.17% 45.39% 33.35% 34.16% 27.35% 15.11% 29.23% 29.71% 21.81% 35.51% 46.59% 23.30% 32.95%

0.00% 0.00% 0.00% 0.10% 0.00% 0.00% 2.77% 0.66% 0.00% 0.00% 0.00% 7.61% 0.51% 0.63% 0.00% 0.00% 0.00% 0.00% 0.05% 2.35% 0.00% 0.00%

66.34% 64.26% 67.75% 70.40% 62.63% 72.43% 67.73% 66.96% 68.25% 50.83% 54.61% 59.04% 65.33% 72.02% 84.89% 70.77% 70.29% 78.19% 64.44% 51.06% 76.70% 67.05%

Mean 32.42% 0.67% 66.91% Median 32.32% 0.00% 67.39% Weighted Average 36.50% 0.83% 62.67%

Sources: Columns a, c, f, and g were extracted from Value Line. Column d was extracted from Finance.Yahoo.com and represents December 29, 2017 closing stock prices.

Page 17

http:Finance.Yahoo.com

2018 Capitalization Rate Study Gas and Electric Companies Capital Structure

a b c d e f g h i j k l Common Common Mkt Value L.T. Pfd Common Total L.T. Pfd Common

Value Line Stock Stock Price Equity Debt Stock Equity Capital Debt Stock Equity Rating Company Name Outstanding 12/29/17 ($million) ($million) ($million) ($million) ($million) % % %

B++ CMS Energy Corporation 282,083,585 47.30 13,342.55 9,121.00 37.00 13,342.55 22,500.55 40.54% 0.16% 59.30% B++ DTE Energy Company 179,390,286 109.46 19,636.06 11,795.00 0.00 19,636.06 31,431.06 37.53% 0.00% 62.47% B++ El Paso Electric Company 40,591,794 55.35 2,246.76 1,195.90 0.00 2,246.76 3,442.66 34.74% 0.00% 65.26% B++ Entergy Corporation 180,251,407 81.39 14,670.66 14,000.00 203.20 14,670.66 28,873.86 48.49% 0.70% 50.81% B++ Exelon Corporation 960,852,473 39.41 37,867.20 32,090.00 0.00 37,867.20 69,957.20 45.87% 0.00% 54.13% B++ Portland General Electric Company 89,092,325 45.58 4,060.83 2,277.00 0.00 4,060.83 6,337.83 35.93% 0.00% 64.07% B+ CenterPoint Energy, Inc. 431,033,509 28.36 12,224.11 7,531.00 0.00 12,224.11 19,755.11 38.12% 0.00% 61.88% B+ FirstEnergy Corp. 444,858,003 30.27 13,465.85 21,089.00 0.00 13,465.85 34,554.85 61.03% 0.00% 38.97% B+ Great Plains Energy Incorporated 215,661,646 32.24 6,952.93 3,312.00 0.00 6,952.93 10,264.93 32.27% 0.00% 67.73% B+ PNM Resources, Inc. 79,653,624 40.15 3,198.09 2,282.40 11.50 3,198.09 5,491.99 41.56% 0.21% 58.23% B+ SCANA Corporation 142,616,254 39.78 5,673.27 6,455.00 0.00 5,673.27 12,128.27 53.22% 0.00% 46.78% B PG&E Corporation 514,422,806 44.83 23,061.57 16,619.00 252.00 23,061.57 39,932.57 41.62% 0.63% 57.75%



Page 18



Beta Analysis a b c d e f g h i

Value Standard Company's Debt Value Line Line Zacks & Poor's Average Tax Equity Unlevered Rating Company Name Beta Beta Beta Beta Rate Ratio1 Beta2

A+ American Electric Power Co., Inc. 0.65 0.30 0.21 0.39 0.36 0.59 0.47 A+ Consolidated Edison, Inc. 0.50 0.10 0.00 0.20 0.36 0.60 0.36 A+ Pinnacle West Capital Corporation 0.70 0.38 0.27 0.45 0.33 0.47 0.53 A+ WEC Energy Group, Inc. 0.60 0.15 0.05 0.27 0.38 0.46 0.47 A+ Xcel Energy Inc. 0.60 0.21 0.07 0.29 0.36 0.67 0.42 A ALLETE, Inc. 0.80 0.47 0.49 0.59 0.20 0.50 0.57 A Alliant Energy Corporation 0.70 0.46 0.37 0.51 0.15 0.48 0.50 A Ameren Corporation 0.70 0.37 0.33 0.47 0.40 0.55 0.53 A Avista Corporation 0.75 0.42 0.36 0.51 0.37 0.63 0.54 A Black Hills Corporation 0.90 0.73 0.70 0.78 0.30 0.72 0.60 A Duke Energy Corporation 0.60 0.26 0.13 0.33 0.32 0.75 0.40 A Edison International 0.65 0.24 0.14 0.34 0.10 0.64 0.41 A Eversource Energy 0.65 0.31 0.30 0.42 0.37 0.54 0.49 A Hawaiian Electric Industries, Inc. 0.70 0.50 0.30 0.50 0.36 0.46 0.54 A MGE Energy, Inc. 0.75 0.33 0.30 0.46 0.35 0.23 0.65 A NextEra Energy, Inc. 0.65 0.31 0.21 0.39 0.29 0.53 0.47 A OGE Energy Corp. 0.95 0.90 0.65 0.83 0.32 0.40 0.75 A Otter Tail Corporation 0.90 0.82 0.76 0.83 0.25 0.38 0.70 A Sempra Energy 0.80 0.62 0.48 0.63 0.38 0.51 0.61 A The Southern Company 0.55 0.14 0.07 0.25 0.33 0.69 0.38 A Vectren Corporation 0.75 0.83 0.65 0.74 0.35 0.44 0.58 A Westar Energy, Inc. 0.70 0.42 0.37 0.50 0.34 0.56 0.51

Mean 0.71 0.42 0.33 0.49 0.54 0.52 Median 0.70 0.38 0.30 0.46 0.54 0.52 Weighted Average 0.38 0.60 0.46

Relevered Beta based on 45% Debt Capital Structure and Mean Unlevered Beta 3 0.83 Relevered Beta based on 45% Debt Capital Structure and Weighted Average Unlevered Beta 3 0.72

Sources: Columns a, c, and g were extracted from Value Line. Column d was extracted from Zacks.com. Column e was extracted from Standard and Poor's Stock Reports.

1 Average debt to equity ratio over the last five years. 2 Unlevered Beta = Beta/[1+(1-tc)(D/E)]; where D/E is the debt to equity ratio, tc is the company's most recent tax rate. 3 Relevered Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the debt to equity ratio, tp is a prospective purchaser's tax rate (assumed to be 28%).

Page 19

http:Zacks.com


Beta Analysis

a b c d e f g h i Value Standard Company's Debt

Value Line Line Zacks & Poor's Average Tax Equity Unlevered Rating Company Name Beta Beta Beta Beta Rate Ratio1 Beta2

B++ CMS Energy Corporation 0.65 0.19 0.07 0.30 0.33 0.83 0.42 B++ DTE Energy Company 0.65 0.23 0.19 0.36 0.25 0.73 0.42 B++ El Paso Electric Company 0.80 0.48 0.43 0.57 0.36 0.58 0.58 B++ Entergy Corporation 0.65 0.55 0.40 0.53 0.06 1.00 0.34 B++ Exelon Corporation 0.70 0.30 0.22 0.41 0.33 0.87 0.44 B++ Portland General Electric Company 0.70 0.30 0.30 0.43 0.21 0.65 0.46 B+ CenterPoint Energy, Inc. 0.90 0.62 0.49 0.67 0.36 0.77 0.60 B+ FirstEnergy Corp. 0.70 0.25 0.14 0.36 0.38 1.40 0.37 B+ Great Plains Energy Incorporated 0.75 0.47 0.37 0.53 NMF 0.74 NMF B+ PNM Resources, Inc. 0.75 0.36 0.28 0.46 0.34 0.78 0.50 B+ SCANA Corporation 0.65 0.20 0.22 0.36 0.31 0.79 0.42 B PG&E Corporation 0.65 0.14 0.21 0.33 0.21 0.63 0.43




1 Average debt to equity ratio over the last five years. 2 Unlevered Beta = Beta/[1+(1-tc)(D/E)]; where D/E is the debt to equity ratio, tc is the company's most recent tax rate. 3 Relevered Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the debt to equity ratio, tp is the prospective purchaser's tax rate (assumed to be 28%).

Page 20

2018 Capitalization Rate Study Natural Gas Companies

Flotation Cost Adjustment

Equity Preferred Stock Debt Value Line Rating

Recommended Rate

Flotation Cost in %

Adjusted Rate

Moody's Rating

Recommended Rate

Flotation Cost in %

Adjusted Rate

Moody's Rating

Recommended Rate

Flotation Cost in %

Adjusted Rate

A 10.05% 4.00% 10.47% A3 6.00% 1.50% 6.09% A1 3.90% 1.50% 3.96%

B++ 10.10% 4.00% 10.52% A2 3.96% 1.50% 4.02%

Not Rated 12.25% 4.00% 12.76% A3 4.07% 1.50% 4.14%

Not Rated 14.50% 4.00% 15.10% Baa1 4.19% 1.50% 4.25%

Baa2 4.30% 1.50% 4.37%

Baa3 4.44% 1.50% 4.51%

Ba1 4.58% 1.50% 4.65%

Ba2 4.72% 1.50% 4.79%

Ba3 4.86% 1.50% 4.93%

Not Rated 5.42% 1.50% 5.50%




Page 21



Common Equity Preferred Stock Bonds Value Line Rating

Rate of 1 Return

Moody's Bond Rating

Rate of 2 Return

Moody's Bond Yields

Moody's Rating

Rate of 3 Return

A

B++

Not Rated

Not Rated

10.05%

10.10%

12.25%

14.50%

A3 6.00% Aa

A

Baa

Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Not Rated

3.57% 3.63% 3.70% 3.76% 3.87% 3.99% 4.10% 4.24% 4.38% 4.52% 4.66% 4.80% 4.94% 5.08% 5.22%

1 The Rate of Return on Common Equity was developed by staff based on the relative risks of the utilities in conjunction with the results of various financial models and pertinent information from different sources. Consideration was also given to the latest decisions of the California Public Utilities Commission. For 2018, the return on equity (ROE) and return on rate base (ROR) for Southern California Gas Company are 10.05% and 7.34%, respectively (D.17-07-005); for Southwest Gas Corporation, the ROE and ROR are 10.10% and 8.18% , respectively.

2 The Rate of Return on Preferred Stocks was developed by staff based on the relative risks of the utilities. Consideration was given to the latest decisions of the California Public Utilities Commission.

3 The Rates of Return on Bonds were based on the 2017 Moody's "Utility Bond Yields" reports. Because Moody's assigns yields only to groups Aaa, Aa, A and Baa, staff interpolated the difference between these groups to further refine the ratings.

Page 22




A+, A, B++, B+ Not Rated


11.29% 2.65%

11.29% 2.65%

Risk Premium Beta 2

8.64% 0.92

8.64% 1.25


7.94% 2.65%

10.80% 2.65%


1 US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 29, 2017 2 The betas are based on staff's judgement in conjunction with the results from the beta analysis of the study sample and Damodaran Online.

Page 23




A+, A, B++, B+ Not Rated



11.53% 5.15%

Risk Premium Beta 2

6.38% 0.92

6.38% 1.25


5.86% 2.65%

7.98% 2.65%


1 Damodaran Online, January 5, 2018 2 The betas are based on staff's judgement in conjunction with the results from the beta analysis of the study sample and Damodaran Online. 3 US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 29, 2017

Page 24

2018 Capitalization Rate Study Natural Gas Companies Equity Rates



A+ Atmos Energy Corporation 85.89 3.80 3.60 1.80 1.94 2.26% 6.50% 6.50% 4.42% 8.76% 8.76% A+ New Jersey Resources Corp. 40.20 1.90 1.73 1.04 1.09 2.71% 3.50% 4.00% 4.73% 6.21% 6.71% A Northwest Natural Gas Company 59.16 2.45 2.25 1.88 1.89 3.19% 1.00% 5.75% 4.14% 4.19% 8.94% A South Jersey Industries, Inc. 31.23 1.45 1.15 1.10 1.15 3.68% 4.00% 7.75% 4.64% 7.68% 11.43% A WGL Holdings Inc. 85.33 3.50 3.11 2.02 2.08 2.44% 3.00% 4.00% 4.10% 5.44% 6.44% B++ Southwest Gas Holdings, Inc. 80.48 3.70 3.55 1.98 2.08 2.58% 7.50% 6.95% 4.60% 10.08% 9.53% B++ Spire Inc. 75.15 3.80 3.43 2.10 2.25 2.99% 5.00% 5.83% 5.06% 7.99% 8.83% B++ UGI Corporation 46.95 2.50 2.29 0.96 1.02 2.17% 4.00% 6.35% 5.32% 6.17% 8.52% B+ NiSource Inc. 25.67 1.25 0.85 0.70 0.74 2.88% 6.50% 6.37% 4.87% 9.38% 9.25%



Page 25





A+ Atmos Energy Corporation 6.00% 7.00% 6.50% 6.50% A+ New Jersey Resources Corp. 2.00% 6.00% N/A 4.00% A Northwest Natural Gas Company 7.00% 4.50% N/A 5.75% A South Jersey Industries, Inc. 5.50% 10.00% N/A 7.75% A WGL Holdings Inc. 2.00% 6.00% N/A 4.00% B++ Southwest Gas Holdings, Inc. 8.00% 5.90% N/A 6.95% B++ Spire Inc. 8.00% 5.00% 4.50% 5.83% B++ UGI Corporation 6.50% N/A 6.20% 6.35% B+ NiSource Inc. 5.50% 5.90% 7.70% 6.37%



Page 26


2018 Capitalization Rate Study Natural Gas Companies Capital Structure



A+ Atmos Energy Corporation 106,065,596 85.89 9,109.97 3,066.70 0.00 9,109.97 12,176.67 25.19% 0.00% 74.81% A+ New Jersey Resources Corp. 86,538,661 40.20 3,478.85 897.70 0.00 3,478.85 4,376.55 20.51% 0.00% 79.49% A Northwest Natural Gas Company 28,713,052 59.16 1,698.66 757.40 0.00 1,698.66 2,456.06 30.84% 0.00% 69.16% A South Jersey Industries, Inc. 79,549,080 31.23 2,484.32 1,180.30 0.00 2,484.32 3,664.62 32.21% 0.00% 67.79% A WGL Holdings Inc. 51,219,000 85.33 4,370.52 1,235.60 28.20 4,370.52 5,634.32 21.93% 0.50% 77.57% B++ Southwest Gas Holdings, Inc. 47,731,840 80.48 3,841.46 1,732.00 0.00 3,841.46 5,573.46 31.08% 0.00% 68.92% B++ Spire Inc. 48,266,858 75.15 3,627.25 1,995.00 0.00 3,627.25 5,622.25 35.48% 0.00% 64.52% B++ UGI Corporation 173,373,824 46.95 8,139.90 4,014.60 0.00 8,139.90 12,154.50 33.03% 0.00% 66.97% B+ NiSource Inc. 336,793,693 25.67 8,645.49 7,518.60 0.00 8,645.49 16,164.09 46.51% 0.00% 53.49%



Page 27


2018 Capitalization Rate Study Natural Gas Companies Beta Analysis

a b c d e f g h i Value Standard Company's Debt

Value Line Line Zacks & Poor's Average Tax Equity Unlevered Rating Company Name Beta Beta Beta Beta Rate Ratio1 Beta2

A+ Atmos Energy Corporation 0.70 0.40 0.39 0.50 0.37 0.28 0.60 A+ New Jersey Resources Corp. 0.80 0.43 0.49 0.57 0.32 0.39 0.63 A Northwest Natural Gas Company 0.70 0.40 0.31 0.47 0.35 0.45 0.54 A South Jersey Industries, Inc. 0.85 0.71 0.64 0.73 0.25 0.43 0.64 A WGL Holdings Inc. 0.80 0.66 0.69 0.72 0.39 0.29 0.68 B++ Southwest Gas Holdings, Inc. 0.80 0.61 0.48 0.63 0.35 0.49 0.61 B++ Spire Inc. 0.70 0.30 0.34 0.45 0.32 0.66 0.48 B++ UGI Corporation 0.90 0.68 0.69 0.76 0.30 0.56 0.65 B+ NiSource Inc. 0.60 0.37 0.11 0.36 0.36 0.81 0.39





Page 28

2018 Capitalization Rate Study Water Utility Companies

Flotation Cost Adjustment

Value Line Rating

Equity Recommended

Rate Flotation Cost in %

Adjusted Rate

Moody's Rating

Debt Recommended


Adjusted Rate

A 9.43% 4.00% 9.82% Not Rated 3.81% 1.50% 3.87%




Page 29



Value LineRating

Common Equity Rate of

Return1 Moody'sRating

Bonds Rate of

Return

A 9.43% Not Rated 3.81%

1 In developing the Rate of Return on Common Equity, staff considered the latest decision of the California Public Utilities Commission and other pertinent information. For 2018, the return on equity and return on rate base for Golden State Water Company are 9.43% and 8.34%, respectively (D.12-07-009).

Page 30


A, B++, B+

Expected Future Return, S&P 500 11.29% Less: Risk Free Return - Long-Term Treasury Rates

Risk Premium 2 Beta

Adjusted Risk Premium

1 2.65%

8.64% 0.76

6.54% 1 Risk Free Return - Long-Term Treasury Rates

Projected Return on Equity

2.65%

9.19%



1 US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 29, 2017 2 The betas are based on staff's judgement in conjunction with the results from the beta analysis of the study sample.

Page 31


A, B++, B+

Common Stock Return, S&P 500 (1928 - 2017) 1 11.53% Less: Return on 10 Year Treasury Bonds (1928 - 2017) 1 5.15%

Risk Premium 2 Beta

6.38% 0.76

Adjusted Risk Premium 4.83% 3 Risk Free Return - Long-Term Treasury Rates


2.65%

7.48%



1 Damodaran Online, January 5, 2018 2 The betas are based on staff's judgement in conjunction with the results from the beta analysis of the study sample. 3 US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 29, 2017

Page 32


Equity Rates



A American States Water Company 57.91 1.85 1.85 0.99 1.06 1.83% 7.50% 4.83% 3.19% 9.33% 6.66% A Aqua America, Inc. 39.23 1.45 1.36 0.79 0.85 2.17% 9.00% 5.83% 3.70% 11.17% 8.00% B++ California Water Service Group 45.35 1.55 1.40 0.72 0.75 1.65% 7.50% 8.00% 3.42% 9.15% 9.65% B++ Middlesex Water Company 39.91 1.65 1.40 0.86 0.91 2.28% 5.00% 9.00% 4.13% 7.28% 11.28% B+ American Water Works Co., Inc. 91.01 3.30 3.00 1.62 1.78 1.96% 10.00% 7.83% 3.63% 11.96% 9.79% B+ The York Water Co. 33.90 1.15 1.05 0.65 0.70 2.06% 8.00% 9.50% 3.39% 10.06% 11.56%



Page 33





A American States Water Company 6.50% 4.00% 4.00% 4.83% A Aqua America, Inc. 7.00% 5.50% 5.00% 5.83% B++ California Water Service Group 10.00% 6.00% N/A 8.00% B++ Middlesex Water Company 9.00% N/A N/A 9.00% B+ American Water Works Co., Inc. 8.50% 7.50% 7.50% 7.83% B+ The York Water Co. 9.50% N/A N/A 9.50%



Page 34


2018 Capitalization Rate Study Water Utility Companies Capital Structure



A American States Water Company 36,679,175 57.91 2,124.09 321.00 0.00 2,124.09 2,445.09 13.13% 0.00% 86.87% A Aqua America, Inc. 177,690,598 39.23 6,970.80 1,952.50 0.00 6,970.80 8,923.30 21.88% 0.00% 78.12% B++ California Water Service Group 48,015,000 45.35 2,177.48 519.70 0.00 2,177.48 2,697.18 19.27% 0.00% 80.73% B++ Middlesex Water Company 16,346,036 39.91 652.37 135.80 2.40 652.37 790.57 17.18% 0.30% 82.52% B+ American Water Works Co., Inc. 178,375,400 91.01 16,233.95 6,672.00 9.00 16,233.95 22,914.95 29.12% 0.04% 70.84% B+ The York Water Co. 12,859,432 33.90 435.93 88.90 0.00 435.93 524.83 16.94% 0.00% 83.06%



Page 35



2018 Capitalization Rate Study Water Utility Companies Beta Analysis

a b c d e f g h i

Value Line Rating Company Name

Value Line Beta

Zacks Beta

Standard & Poor's Beta

Average Beta

Company's Tax Rate

Debt Equity Ratio1

Unlevered Beta2

A A B++ B++ B+ B+

American States Water Company 0.80 0.49 0.43 0.57 Aqua America, Inc. 0.75 0.59 0.45 0.60 California Water Service Group 0.80 0.74 0.64 0.73 Middlesex Water Company 0.80 0.45 0.42 0.56 American Water Works Co., Inc. 0.65 0.27 0.23 0.38 The York Water Co. 0.80 0.57 0.56 0.64

Mean 0.77 0.52 0.46 0.58 Median 0.80 0.53 0.44 0.59 Weighted Average 0.48

3 Relevered Beta based on 45% Debt Capital Structure and Mean Unlevered Beta Relevered Beta based on 45% Debt Capital Structure and Weighted Average Unlevered Beta 3

0.37 0.09 0.35 0.32 0.40 0.24

0.21 0.32 0.34 0.30 0.52 0.25

0.32 0.31 0.43

0.51 0.46 0.60 0.46 0.29 0.54

0.48 0.48 0.37

0.76 0.59


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Ratings Capital Structure Rates of Return Basic Cap Common Common

SBE No. Company Name Financial Bond Equity Debt Equity Debt Rate 153 Transwestern Pipeline Company Not Rated Not Rated 70% 30% 13.54% 4.16% 10.73%

180 North Baja Pipeline, LLC Not Rated Not Rated 70% 30% 13.54% 4.16% 10.73%

187 Mojave Pipeline Company, LLC Not Rated Not Rated 70% 30% 13.54% 4.16% 10.73%

188 Kern River Gas Transmission Company Not Rated Not Rated 70% 30% 13.54% 4.16% 10.73%

189 Standard Pacific Gas Line, Incorporated Not Rated Not Rated 70% 30% 13.54% 4.16% 10.73%

190 Tuscarora Gas Transmission Company Not Rated Not Rated 70% 30% 13.54% 4.16% 10.73%

196 Questar Southern Trails Pipeline Company Not Rated Not Rated 70% 30% 13.54% 4.16% 10.73%

197 El Paso Natural Gas Company, LLC Not Rated Not Rated 70% 30% 13.54% 4.16% 10.73%


Natural Gas Transmission Companies

Page 37

2018 Capitalization Rate Study Natural Gas Transmission Companies

Industry Notes

Interstate gas transmission companies are regulated by the Federal Energy Regulatory Commission (FERC).

National Fuel Gas Company was removed from the 2018 Capitalization Study sample.

The following utilities were added to the 2018 Capitalization Rate Study sample:

1. EQT Corporation. 2. Boardwalk Pipeline Partners, LP. 3. EQT Midstream Partners, LP.


Staff relied upon the results of the following models in the development of equity rates:

1. Discounted Cash Flow 2. Capital Asset Pricing Model (Ex Post and Ex Ante)

Page 38

2018 Capitalization Rate Study Natural Gas Transmission Companies Flotation Cost Adjustment

Value Line Rating

Equity Recommended


Adjusted Rate

Moody's Rating

Debt Recommended


Adjusted Rate

Not Rated 13.00% 4.00% 13.54% Not Rated 4.10% 1.50% 4.16%




Staff applied a bond rating of Baa for the Natural Gas Transmission Companies, which represents the estimated cost of debt for the companies in the study.

Page 39


Comparison of Return on Common Equity

Description 2018 2017 Change

E/P Ratio - Mean 6.01% 4.55% 1.46% E/P Ratio - Median 5.26% 4.86% 0.40%

Dividends Yield + Dividends Growth - Mean 15.26% 11.66% 3.60% Dividends Yield + Dividends Growth - Median 15.68% 12.27% 3.41%

Dividends Yield + Earnings Growth - Mean 16.56% 14.32% 2.24% Dividends Yield + Earnings Growth - Median 17.04% 12.65% 4.39%

Capital Asset Pricing Model (CAPM) - Ex Ante 12.24% 10.49% 1.75% Capital Asset Pricing Model (CAPM) - Ex Post 9.73% 8.56% 1.17%

State-Assessed Properties Division Recommendation: 13.00% 11.75% 1.25%

The Discounted Cash Flow (DCF) model is computed using data from a sample of gas transmission companies with similar risk and operations.

The information considered by staff includes the results of DCF analysis (Dividends Yield + Dividends Growth and Dividends Yield + Earnings Growth) and the results of the Capital Asset Pricing Model (CAPM) analysis.

Page 40


Equity Rates

a b c d e f g h i j k l m Stock 2018 2018 Dividend Est. Est. E/P Div Yld+ Div Yld+

Value Line Price Est. 2017 2017 Est. Yield Dividend Earnings Ratio Div Grwh Engs Grwh Rating Company Name 12/29/17 Earnings Earnings Dividends Dividends (g/c) Growth Growth (d/c) (h+i) (h+j)

B++ EQT Corporation 56.92 1.55 0.95 0.12 0.16 0.28% 5.00% 16.83% 2.72% 5.28% 17.11% B++ EQT Midstream Partners, LP 73.10 5.75 5.40 3.66 4.38 5.99% 15.50% 10.97% 7.87% 21.49% 16.96% B+ Enterprise Products Partners, LP 26.51 1.55 1.30 1.67 1.73 6.53% 10.00% 8.03% 5.85% 16.53% 14.56% B+ ONEOK, Inc. 53.45 2.40 1.75 2.72 3.10 5.80% 8.00% 13.33% 4.49% 13.80% 19.13% B+ Western Gas Partners, LP 48.09 2.25 1.80 3.53 3.77 7.84% 7.00% 10.70% 4.68% 14.84% 18.54% C++ Boardwalk Pipeline Partners, LP 12.91 1.35 1.20 0.40 0.40 3.10% 16.50% 9.95% 10.46% 19.60% 13.05%


Sources: Columns a, d, e, f, g, and i were extracted from Value Line. Column c was extracted from Finance.Yahoo.com and represents December 29, 2017 closing stock prices. Column j is an average of Value Line, Zacks.com and ThomsonReuters.com.

Page 41


2018 Capitalization Rate Study Natural Gas Transmission Companies Long Term Earnings Growth


B++ EQT Corporation 20.50% 15.00% 15.00% 16.83% B++ EQT Midstream Partners, LP 11.00% 12.00% 9.90% 10.97% B+ Enterprise Products Partners, LP 12.50% 5.10% 6.50% 8.03% B+ ONEOK, Inc. 18.50% 11.80% 9.70% 13.33% B+ Western Gas Partners, LP 13.50% 6.00% 12.60% 10.70% C++ Boardwalk Pipeline Partners, LP 12.50% NMF 7.40% 9.95%


Sources: Columns a, b, and c were extracted from the Value Line Investment Survey Reports. Column d was extracted from Zacks.com. Column e was extracted from ThomsonReuters.com.

Page 42

Component Industry Computation

Expected Future Return, S&P 500 11.29% Less: Risk Free Return - Long-Term Treasury Rates

Risk Premium

1 2.65% 8.64%

Relevered Beta Adjusted Risk Premium

1.11 9.59%

1 Risk Free Return - Long-Term Treasury Rates 2.65%

Projected Return on Equity 12.24%



1 US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 29, 2017

Page 43

Component Industry Computation

Common Stock Return, S&P 500 (1928-2017) 1 11.53% Less: Return on 10 Year Treasury Bonds (1928-2017) 1 5.15%

Risk Premium 6.38% Relevered Beta 1.11 Adjusted Risk Premium 7.08%

2 Risk Free Return - Long-Term Treasury Rates


2.65%

9.73%



1 Damodaran Online, January 5, 2018 2 US Department of the Treasury - Composite Long-Term Rates > 10 yrs, December 29, 2017

Page 44

a b c d e f g h i

Value Line Rating Company Name

Value Lines Beta

Zacks Beta

Standard & Poor's Beta

Average Beta

Company's Tax Rate

Debt Equity

Ratio 1 Unlevered

2 Beta B++ B++ B+ B+ B+ C++

EQT Corporation 1.00 0.76 0.79 EQT Midstream Partners, LP 1.25 0.89 0.94 Enterprise Products Partners, LP 1.30 0.88 0.92 ONEOK, Inc. 1.55 1.25 1.07 Western Gas Partners, LP 1.40 1.14 1.13 Boardwalk Pipeline Partners, LP 1.00 0.72 0.76

Mean 1.25 0.94 0.94 Median 1.28 0.89 0.93 Weighted

Relevered Beta based on 30% Debt Capital Structure Relevered Beta based on 30% Debt Capital Structure and a weighted average Beta

0.85 1.03 1.03 1.29 1.22 0.83

1.04 1.03 1.07

0.35 0.40 0.40 0.25 0.40 0.40

1.08 3

1.11 3

0.26 0.17 0.38 0.54 0.40 0.86

0.44 0.39 0.41

0.73 0.93 0.84 0.92 0.99 0.54

0.83 0.88 0.85

1 Average debt to equity ratio over the last five years. 2 Unlevered Beta = Average Beta/[1+(1-tc)(D/E)]; where D/E is the debt to equity ratio, tc is the company's most recent tax rate. 3 Relevered Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the debt to equity ratio, tp is a prospective purchaser's tax rate (assumed to be 28%).


Beta Analysis

Sources: Columns a, b, and c were extracted from Value Line. Column d was extracted from Zacks.com. Column e was extracted from Standard and Poor's Stock Reports.

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Capital Structure

a b c d e f g h i j k l Moody's Common Common Market Value L.T. Common Total L.T. Common

Value Line Bond P/S Stock Stock Price Equity Debt Equity Capital Debt Equity Rating Rating Rating Company Name Outstanding 12/29/17 ($million) ($million) ($million) ($million) % %

B++ NR NR EQT Corporation 173,343,000 56.92 9,866.68 2,586.00 9,866.68 12,452.68 20.80% 79.20% B++ NR NR EQT Midstream Partners, LP 80,581,758 73.10 5,890.53 986.90 5,890.53 6,877.43 14.30% 85.70% B+ NR NR Enterprise Products Partners, LP 2,152,702,622 26.51 57,068.15 21,709.90 57,068.15 78,778.05 27.60% 72.40% B+ NR NR ONEOK, Inc. 383,436,687 53.45 20,494.69 8,092.00 20,494.69 28,586.69 28.30% 71.70% B+ NR NR Western Gas Partners, LP 152,602,105 48.09 7,338.64 3,343.90 7,338.64 10,682.54 31.30% 68.70% C++ NR NR Boardwalk Pipeline Partners, LP 250,296,782 12.91 3,231.33 3,585.70 3,231.33 6,817.03 52.60% 47.40%

Mean 29.15% 70.85% Median 27.95% 72.05% Weighted Average 27.97% 72.03%

Recommended Capital Structure for Natural Gas Transmission Companies for lien date January 1, 2018: Debt - 30% Equity - 70%

Sources: Columns a, e and h were extracted from Value Line. Column f was extracted from Finance.Yahoo.com and represents December 29, 2017 closing stock prices.

NR - Not Rated

Page 46


Bonds - Rate of Return

Bond Rating Utility Bond Yield Aaa Aa A Baa Avg Utility

As of December 29, 2017 N/A 3.57% 3.76% 4.10% 3.81%

Source: Moody's Daily Long-Term Corporate Bond Yield Averages as of December 29, 2017.

Page 47

Facility Type

Ratings Capital Structure Rates of Return Basic Cap

3RateFinancial Bond Common Equity Debt

Common Equity Debt

Modern Electric Generation Technology 1 B B2 65% 35% 14.84% 6.35% 11.87%

2 Older Electric Generation Technology B B2 65% 35% 16.93% 7.36% 13.58%

California State Board of Equalization State-Assessed Properties Division 2018 Capitalization Rate Study Electric Generation Facilities

1 Modern Electric Generation Technology - Generally high efficiency combined-cycle or simple cycle gas turbine electric generation facilities incorporating contemporary generation technologies. 2 Older Electric Generation Technology - Generally older steam turbine electric generation facilities that were sold off by vertically integrated electric utilities and for which no replacements, other than for routine maintenance, have been made.

3 Staff may adjust the rates stated above if the specific situation of a facility warrants an adjustment to its basic capitalization rate.

Page 48

2018 Capitalization Rate Study Electric Generation Facilities

Industry Notes

Staff relied primarily on the Capital Asset Pricing Model (CAPM) and Risk Premium Analysis in the development of equity rates. Consideration was given to both the Ex Post and Ex Ante adjusted risk premiums.

Dynegy, Inc. was removed from the 2018 Capitalization Rate Study sample due to lack of data.

The Discounted Cash Flow Model was not relied upon because not all of the merchant generators in the sample are currently paying dividends.

Staff's recommended capital structure of 65% equity and 35% debt provides sufficient coverage of interest and principal payments on debt.

Staff added a risk premium of 100 basis points to the debt rate for older technology to recognize the markets perception of additional risk present in operating these types of facilities.

Staff considers the risk associated with older facilities to be greater than that of newer facilities, and has adjusted the beta used in the CAPM calculation upward to reflect this additional risk.


Page 49

Facility Equity Debt

Recommended Flotation Adjusted Recommended Flotation Adjusted Type Rate Cost in % Rate Rate Cost in % Rate

Modern Electric Generation Technology 1 14.25% 4.00% 14.84% 6.25% 1.50% 6.35%

2 Older Electric Generation Technology 16.25% 4.00% 16.93% 7.25% 1.50% 7.36%

2018 Capitalization Rate Study Electric Generation Facilities Flotation Cost Adjustment




1 The Modern Electric Generation Technology Recommended Debt Rate was developed by staff based on the relative rates of the utilities and other pertinent information from various sources. 2 The Older Electric Generation Technology Recommended Debt Rate is equal to the Modern Electric Generation Technology Recommended Debt Rate with an additional risk premium of 100 basis points.

Page 50



Common Equity Bonds Facility Rate of Moody's Bond Moody's Rate of Type Return 1 Yields Rating Return 2

Modern Electric Generation Technology 14.25% Aa Aa2 3.57% Aa3 3.63% A1 3.70%

A A2 3.76% Older Electric Generation Technology 16.25% A3 3.87%

Baa1 3.99% Baa Baa2 4.10%

Baa3 4.24% Ba1 4.38% Ba2 4.52% Ba3 4.66% B1 4.80% B2 4.94% B3 5.08% Caa1 5.22%

1 The Rate of Return on Common Equity was developed by staff based on the relative risk of the utilities in conjunction with the results of the various financial models and pertinent information from various sources. 2 Rates of Return on Bonds are based on Moody's "Utility Bond Yields" as of December 29, 2017. However, because Moody's assigns a yield to the groups Aa, A and Baa for bonds, the staff interpolates the difference between these groups in order to achieve a further refinement of the ratings.

Page 51


Comparison of Rates of Return on Common Equity

All Facilities in Study

E/P Ratio-Mean E/P Ratio-Median

Div Yld + Div Growth-Mean Div Yld + Div Growth-Median

Div Yld + Div Growth-Weighted Avg.

Div Yld + Earn.Growth-Mean Div Yld + Earn.Growth-Median

Div Yld + Earn.Growth-Weighted Avg.

2018 2017 Change 6.17% 5.35%

8.81% 8.99% 10.70%

8.88% 8.49% 9.26%

4.32% 5.65%

4.06% 7.98% 10.78%

7.07% 8.54% 8.70%

1.85% -0.30%

4.75% 1.01% -0.08%

1.81% -0.05% 0.56%

Merrill Lynch Industry Factor - Required Return IPPs 12.50% 11.80% 0.70%

Damodoran Online - Return on Equity by Sector (Power) 15.55% 4.37% 11.18%

Damodoran Online - Return on Equity by Sector (Utility General) 9.95% 9.57% 0.38%

Modern Older Technology Technology

2017 Recommended Rate 13.50% 15.50%

CAPM - Ex Ante 13.28% 15.44% CAPM - Ex Post 10.50% 12.09% Risk Premium Analysis 1 14.19% 16.80%

2018 Recommended Rate 14.25% 16.25%

1 Risk Premium Analysis estimates the market indicated cost of equity by adding the appropriate "adjusted risk premium" to the corresponding cost of debt.

Page 52



Component Modern Technology Types of Facilities

Older Technology


11.29% 2.65%

11.29% 2.65%

Risk Premium Beta 2

8.64% 1.23

8.64% 1.48


10.63% 2.65%

12.79% 2.65%


1 US Department of the Treasury - Composite Long-Term Rates >10 yrs, December 29, 2017 2 The betas are based on staff's judgment in conjunction with the results of the Beta Analysis. See explanation contained in the Industry Notes.

Page 53



Component Modern Technology Types of Facilities

Older Technology



11.53% 5.15%

Risk Premium Beta 2

6.38% 1.23

6.38% 1.48


7.85% 2.65%

9.44% 2.65%


1 Damodaran Online, January 5, 2018 2 The betas are based on staff's judgment in conjunction with the results of the Beta Analysis. See explanation contained in the Industry Notes. 3 US Department of the Treasury - Composite Long-Term Rates >10 yrs, December 29, 2017

Page 54


Equity Rates

a

Value Line Rating

b

Company Name

c Stock Price 12/29/17

d Est. 2018 Earnings

e

2017 Earnings

f

2017 Dividends

g Est. 2018

Dividends

h Dividend Yield (g/c)

i Est.

Dividend Growth

j Est.

Earnings Growth

k E/P Ratio (d/c)

l Div Yld+ Div Grth (h+i)

m Div Yld+ ErngsGrth (h+j)

B+ B+ B

Merchant Generators Calpine Corp. NRG Energy, Inc. AES Corp.

15.13 28.48 10.83

0.85 1.45 1.20

-0.05 -1.50 0.65

0.00 0.12 0.61

0.00 0.12 0.66

0.00% 0.42% 6.09%

0.00% -0.50% 16.50%

3.00% NMF 8.30%

5.62% 5.09% 11.08%

0.00% -0.08% 22.59%

3.00% NMF

14.39%

A+ A A

Diversified Electric Utilities Xcel Energy Inc. Duke Energy Corp. NextEra Energy, Inc.

48.11 84.11 156.19

2.40 4.80 7.05

2.30 4.30 6.70

1.44 3.49 3.93

1.52 3.64 4.44

3.16% 4.33% 2.84%

6.00% 4.50% 9.50%

5.33% 3.90% 7.47%

4.99% 5.71% 4.51%

9.16% 8.83% 12.34%

8.49% 8.23% 10.31%

Mean Median Weighted Average

2.81% 3.00%

6.00% 5.25%

5.60% 5.33%

6.17% 5.35%

8.81% 8.99% 10.70%

8.88% 8.49% 9.26%

Merrill Lynch Required Return - Independent Power Producers & Energy Traders 12.50%

Sources: Columns a, d, e, f, g and i were extracted from Value Line. Column c was extracted from Finance.Yahoo.com and represents December 29, 2017 closing stock prices. Column j represents the average estimated earnings growth extracted from Value Line, Zacks.com and ThomsonReuters.com.

Page 55





Merchant Generators B+ Calpine Corp. -1.00% 7.00% NMF 3.00% B+ NRG Energy, Inc. NMF NMF NMF NMF B AES Corp. NMF 8.20% 8.40% 8.30%

Diversified Electric Utilities A+ Xcel Energy Inc. 4.50% 5.50% 6.00% 5.33% A Duke Energy Corp. 4.50% 4.00% 3.20% 3.90% A NextEra Energy, Inc. 7.00% 7.40% 8.00% 7.47%


3.75% 4.50%

6.42% 7.00%

6.40% 7.00%

5.60% 5.33% 5.70%

Merrill Lynch 5 Year Growth Estimate - Independent Power Producers & Energy Traders 22.10%


Page 56

2018 Capitalization Rate Study Electric Generation Facilities Capital Structure

a ValueLineRating

b

Company Name

c Common Stock

Outstanding

d Common Stock Price 12/29/2017

e Mkt Value Equity ($million)

f L.T.Debt

($million)

g Pfd Stock

($million)

h Common Equity ($million)

i TotalCapital ($million)

j L.T.Debt %

k Pfd Stock %

l Common Equity %

m Debt Equity Ratio

B+ B+ B

Merchant Generators Calpine Corp. NRG Energy, Inc. AES Corp.

360,589,324 315,867,904 660,386,913

15.13 28.48 10.83

5,455.72 8,995.92 7,151.99

11,281.00 15,658.00 19,776.00

0.00 298.00 0.00

5,455.72 8,995.92 7,151.99

16,736.72 24,951.92 26,927.99

67.40% 62.75% 73.44%

0.00% 1.19% 0.00%

32.60% 36.05% 26.56%

2.07 1.68 2.77


67.87% 67.40% 68.08%

0.40% 0.00% 0.43%

31.74% 32.60% 31.48%

2.17 2.07 2.20

A+ A A

Diversified Electric Utilities Xcel Energy Inc. Duke Energy Corp. NextEra Energy, Inc.

507,762,881 699,975,614 470,397,581

48.11 84.11 156.19

24,428.47 58,874.95 73,471.40

14,092.00 48,929.00 30,345.00

0.00 0.00 0.00

24,428.47 58,874.95 73,471.40

38,520.47 107,803.95 103,816.40

36.58% 45.39% 29.23%

0.00% 0.00% 0.00%

63.42% 54.61% 70.77%

0.58 0.83 0.41


37.07% 36.58% 37.33%

0.00% 0.00% 0.00%

62.93% 63.42% 62.67%

0.61 0.58 0.62

Damodaran Online - Power Industry Damodaran Online - Utility (General) Industry

43.30% 40.21%

0.00% 0.00%

56.70% 59.79%

0.76 0.67

Fidelity.com Research Independent Power Producers & Energy Traders Fidelity.com Research Electric Utilities

4.59 1.44


Page 57



Beta Analysis

a Value Line Rating

b

Company Name

c Value Line Beta

d

Zacks Beta

e Standard & Poor's Beta

f

Average Beta

g Company's Tax Rate

h Debt Equity Ratio 1

i

Unlevered Beta 2

Merchant Generators

B+ B+ B

Calpine Corp. NRG Energy, Inc. AES Corp.

1.10 1.30 1.20

1.05 1.28 1.21

0.97 1.09 1.18

1.04 1.22 1.20

0.00 0.00 0.32

1.93 2.92 2.36

0.36 0.34 0.50

Mean 1.15 0.11 2.40 0.40 Median 1.20 0.00 0.36 Weighted 1.17 0.13 0.41

A+ A A

Diversified Electric Utility Xcel Energy Inc. Duke Energy Corp. NextEra Energy, Inc.

0.60 0.60 0.65

0.21 0.26 0.31

0.07 0.13 0.21

0.29 0.33 0.39

0.33 0.32 0.29

0.66 0.75 0.53

0.20 0.22 0.28

Mean 0.62 0.26 0.14 0.34 0.31 0.65 0.23 Median 0.60 0.26 0.13 0.33 0.32 0.22 Weighted 0.35 0.31 0.24

Merchant Generators Relevered Beta based on 35% Debt Capital Structure Diversified Electric Utilities Relevered Beta based on 35% Debt Capital Structure Merrill Lynch Adjusted Beta Independent Power Producers & Energy Traders Damodaran Online - Cost of Capital by Sector - Power Industry Beta

0.57 0.34 1.23 0.50

3

3


1 Average debt to equity ratio over the last five years. 2 Unlevered Beta = Corrected Beta/[1+(1-tc)(D/E)]; where D/E is the debt to equity ratio, tc is the company's most recent tax rate. 3 Relevered Beta = [Unlevered Beta][1+(1-tp)(D/E)]; where D/E is the debt to equity ratio, tp is a prospective purchaser's tax rate (assumed to be 28%).

Page 58

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Common Equity Debt

Common Equity Debt

Local Exchange Companies 279 Pacific Bell Telephone Company294 Consolidated Communications of California Company284 Citizens Telecommunications Company of California, Inc.201 Frontier California, Inc.

Other Local Exchange Companies

Wireless Companies 2532 Los Angeles SMSA Ltd., Partnership 2552 Fresno MSA Limited Partnership 2559 Cellco Partnership 2606 AT&T Mobility LLC 2669 California RSA #4 Partnership 2748 T-Mobile West, LLC 2720 Sprint Telephony PCS, L.P.

1 Other Wireless Companies

Wireless Reseller Companies

Interexchange Companies 2274 MCI Communications Services, Inc. 2310 AT&T Communications 2372 MCI Metro Access Transmission Services, LLC 2463 CenturyLink Communications, LLC 2014 Sprint Communications Company, L.P.

Other Interexchange Carriers

Other Interexchange Resellers

1 Includes Radio Telephone and Paging Companies

A++ C++ C C

Not Rated

A++ A++ A++ A++ A++ B+ C++

Not Rated

Not Rated

A++ A++ A++ B ++C++

Not Rated

Not Rated

Baa1 B1 B3 B3

Not Rated

Baa1 Baa1 Baa1 Baa1 Baa1 Ba2 B1

Not Rated

Not Rated

Baa1 Baa1 Baa1 Ba3 B1

Not Rated

Not Rated

70% 65% 65% 65%

65%

70% 70% 70% 70% 70% 65% 65%

55%

55%

70% 70% 70% 65% 60%

55%

55%

30% 35% 35% 35%

35%

30% 30% 30% 30% 30% 35% 35%

45%

45%

30% 30% 30% 35% 40%

45%

45%

11.15% 15.36% 15.36% 15.36%

15.73%

10.57% 10.57% 10.57% 10.57% 10.57% 12.76% 14.58%

16.67%

18.75%

11.93% 11.93% 11.93% 14.58% 16.67%

21.35%

24.48%

4.05% 6.01% 6.01% 6.01%

6.26%

4.05% 4.05% 4.05% 4.05% 4.05% 5.22% 5.48%

7.53%

8.04%

4.05% 4.05% 4.05% 4.95% 5.48%

7.53%

8.04%

9.02% 12.09% 12.09% 12.09% 12.42%

8.62% 8.62% 8.62% 8.62% 8.62% 10.12% 11.40%

12.56%

13.93%

9.56% 9.56% 9.56% 11.21% 12.19%

15.13%

17.08%


Telecommunications Companies

Page 59

2018 Capitalization Rate Study Telecommunications Companies

Industry Notes

Staff conducted a consolidated capitalization rate study for the local exchange, wireless, and interexchange industries due to the increasing convergence of these three industries. Separate capitalization rates were estimated for the companies in each of the three industries based on the relative risk experienced by each group of companies within their respe

Documents

2018 Capitalization Rate Study Tax Rule 8 (g) (2) provides the authority for the method in which the capitalization rates were developed in this study. The rule states “the capitalization