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Brown, Williams, Moorhead & Quinn, Inc.

Brown Williams employs specialized consultants who have extensive experience with the financial parameters, methodologies and regulatory policies involved in determining costs of capital, including appropriate returns on equity for energy companies given the level of operating and financial risk associated with comparable companies and the particular subject company for the cost of capital study. Brown Williams can help its clients perform cost of capital studies regardless of industry or regulatory jurisdiction.

Capital Structure

The capital structure is used in the determination of the overall return portion of the cost of service. Typically, the cost of debt and cost of equity are weighted based on the relative contribution of each to the filing company’s capital structure. Brown Williams assists clients with the determination of the appropriate capital structure, testing of such capital structure against benchmark indicators both in the marketplace and prior Commission precedent, as well as building proxy capital structures if necessary.

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Cost of Debt

The cost of debt, as used in a business’ cost of service, represents the weighted-average cost of debt for the filing company. As opposed to the cost of equity, where direct returns cannot be observed for the subject company, the cost of debt is a known tangible figure based on the business’ financing. For this reason, the approach looks at the actual cost of debt for the business, as opposed to looking at market indicators. Brown Williams assists clients with projects ranging from the determination of the appropriate cost of debt based on a business’ outstanding debt, to building a proxy cost of debt based on a representative group of proxy companies.

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Cost of Equity

One of the key drivers in a business’ cost of service, and often one of the more contentious issues in a rate case, the return on equity represents the profit that a business is allowed the opportunity to collect to account for the risks inherent in its equity investment. The return on equity (or “ROE”) is dependent on both market conditions (as discussed below in the DCF Analysis section) and the specific risk factors faced by the filing entity. Brown Williams, through its specialized consultants, consistently monitors the returns observed in today’s dynamic marketplace and has extensive experience working with energy companies to develop an appropriate return on equity based on the company’s operating characteristics.

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DCF Analysis

The Discounted Cash Flow (or “DCF”) method is the primary FERC-adopted tool for calculating the return on equity based on market observations for the proxy group of comparable companies. At its most basic level, the DCF method implies that the ROE for a given proxy company is equivalent to the dividend yield plus the expected growth in future dividends. Brown Williams assists a multitude of clients in the adoption of the DCF method and the challenges that arise from using this method, as well as alternative means of estimating the return on equity.

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Proxy Group Studies

A significant portion of any cost of capital study is devoted to the determination of, and justification for, the proxy group. The proxy group is a list of public companies that closely resemble the subject/filing company. This group is used for purposes ranging from the determination of the return on equity to other issues where a view of the market conditions is needed (cost of debt, capital structure, etc.). The application of the guidelines, as set forth by the FERC, involves a thorough review of potential candidates based on their financial statements and consideration of the rapidly changing marketplace (through merger and acquisition activity, volatile equity markets, and pipeline purchase/ sales/construction). Brown Williams has both an in-depth understanding of the guidelines and requirements for building a representative proxy group, and the hands-on experience defending these studies throughout the litigation process.

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