Suez water rhode island, inc. - RI Public Utilities Commission

Exhibit

Docket No._

SUEZ WATER RHODE ISLAND, INC.

V/AKEFIELD, RHODE ISLAND

RATE OF RETURN

DIRECT TESTIMONY

OF

HAROLD V/ALKER, III

DECEMBER 2017

Prepared by:

GANNETT FLEMING

VALUATION AND RATE CONSULTANTS, LLC

-s*lz-

E]

Valley Forge, Pennsylvania

TABLE OF CONTENTS

INTRODUCTION SUMMARY OF RECOMMENDATION ....... PRINCIPLES OF RATE REGULATION AND FAIR RATE OF RETURN ... INVESTMENT RISK.... DESCRIPTION OF SUEZ WATER RHODE ISLAND, INC. THE INDUSTRY.. COMPARABLE GROUP CAPITAL STRUCTURE ....... EMBEDDED COST RATE FINANCIAL ANALYSIS RISK ANALYSIS.. CAPITAL COST RATES COMMON EQUITY COST RATE ESTIMATE DISCOUNTED CASH FLOW CAPITAL ASSET PRICING MODEL... RISK PREMIUM SUMMARY OF COMMON EQUITY COST RATE..... OVERALL RATE OF RETURN RECOMMENDATION APPENDIX A.

1

I

J 4 5 6 9

t2 t6

T7

20

....... 33

.34 .44 .48 .53 .55 ............1

TERMS, ABBREVIATIONS AND ACRONYMS

Terms, Abbreviations and Acronyms

Deftred

CAPM

Conmrission

Corpany Conparable Conpanies Corrparable Group Cost ofCapital DCF

DPS EPA EPS Financial Risk GICS GO

IOU

[?verage Long- term U. S. Treasury Secr?rities

M/B Moody's

NARUC

Non-Systematic Risk PUC ROE RP S&P SIC SWR SWRI Systematic Risk Value Line Water Group

Capital Asset Pricing Model

Rhode Island Public Utility Conrnission

Suez Water Rhode Island, Inc.

Water Group Followed by Ana?ts

Water

Followed byAna?ts

Investor-required cost rate

Discounted Cash Flow

Dividend per share

U. S. Environmental Protection Agency' s

Eamings per share

L,everage

Global Industry Classification System

General Obligation Bonds

lnvestor Owned Utilitres

Fixed cost capital

Base Risk-Free Rate

Market-to-Book Ratios

Moody's Investors Service

National Association of Regulatory Utility Con?rnissioners

Conpany-Specific Risk

Rhode Island Public Utitty Conrnission

Return on Equity

Risk Premilnn

Standard & Poor's

Standard Industrial Classification

SUEZ Water Resornces Inc.

Suez'Water Rhode Island, lnc.

Non-Diversifiable Risk

Value Line Investment Swvey

'Water Group Followed byAna?ts

11

1

2 a.

A. 4

5 a.

6 A.

7

8 a.

9

10 A.

11

t2

13 a. t4 A.

15 T6 T7

l8 t9 a.

20 A.

2t

22 23

INTRODUCTION

PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.

III. My name is Harold'Walker,

My business mailing address is P. O. Box 80794, Valley

Forge, Pennsylvania 19484.

BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY?

I am employed by Gannett Fleming Valuation and Rate Consultants, LLC as Manager,

Financial Studies.

WHAT IS YOUR EDUCATIONAL BACKGROUND AND EMPLOYMENT

EXPERIENCE?

My educational background, business experience and qualifications are provided in

Appendix A.

SCOPE OF TIMONY

WHAT IS THE PURPOSE OF YOUR TESTIMONY? The purpose of my testimony is to recommend an appropriate overall rate of return that Suez Water Rhode Island, Inc. ("SWRI" or the "Company") should be afforded an opportunity to eam on its water utility service rate base. My testimony is supported by

Exhibit HW-1, which is composed of 19 Schedules.

SUMMARY OF RECOMMENDATION

WHAT IS YOUR RECOMMENDED COST OF EQUITY? My recommendation is that the SWRI be permitted an overall rate of retum of 7.82o/o,

including al0.5o/o cost of common equity, based upon the Company's capital structure at

December 31,2017. My recommended cost of common equity reflects SWRI's unique

risk characteristics.

I

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