Topic:"Discounted Cash Flow" in M12451

9 The average of all three methods for the North American Electric proxy group is 9.9 percent, within the range of 9.29 percent to 10.32 percent. Based on this analysis, we believe a reasonable estimate of NSPI's required ROE is 9.9 percen...

AI summary The document discusses NSPI's request to maintain its authorized ROE of 9.0 percent, contrasting it with the average ROE of 9.9 percent from the North American Electric proxy group. NSPI also proposes a deemed equity ratio of 40.0 percent, citing business and financial risks. The DCF results are based on stock prices and include flotation costs and financial flexibility considerations.

NON-CONFIDENTIAL 1 America) equal to its respective estimates of average long-term nominal GDP growth. 2 Therefore, this approach assumes that utilities' earnings and dividends will grow at 3 rates above nominal GDP growth for 10 years, th...

AI summary The text discusses the assumptions made in estimating the cost of equity (Ke) using a multi-stage DCF model, including growth rates for earnings and dividends over different time periods and the relationship between dividend yield and growth rate in the Constant-Growth DCF model.

5.3.1 DCF Model Overview I use two approaches to apply the DCF model to estimate the appropriate ROE for regulated Canadian utilities using data as at the end of 2024 to: - 1. find the implied rate of return for the overall market, which s...

AI summary This section outlines the use of the Dividend Discount Model (DDM) within the Discounted Cash Flow (DCF) model to estimate the appropriate Return on Equity (ROE) for regulated Canadian utilities, using data from the end of 2024. The model assumes that the value of common shares is based on the present value of expected future dividends, with a constant growth rate applied indefinitely.

erage nominal GDP growth estimate of 3.8% noted above into the single-stage DDM equation provided above, we get the following estimate for the implied equity return for the market as a whole for 2024: 5 Ke = $$(0.0283) \times (1.038) + .03...

AI summary This section discusses the use of the Dividend Discount Model (DDM) and its variations, such as the H-Model, to estimate the implied equity return for the market in 2024. A single-stage DDM estimate yields 6.74%, which is considered reasonable but slightly low compared to other forecasts. The H-Model is introduced as a more flexible approach to account for changing growth rates over time.

5.3.3 Canadian Utility DCF Estimates I will now apply both of the DCF models discussed above to the utilities' samples. Of course, determining the inputs here is somewhat trickier than for the broad market. A common way of estimating the g...

AI summary This section discusses the application of Discounted Cash Flow (DCF) models to estimate growth rates for Canadian utilities, focusing on the sustainable growth rate formula using the earnings retention ratio and Return on Equity (ROE). It emphasizes the reliability of this method compared to overly optimistic analyst estimates.

us target for regulated utilities that operate virtual monopolies in mature markets, with little opportunity for dramatic growth, as also acknowledged previously by the AUC, in the 2013 GCOC Decision: However, the Commission is also mindfu...

AI summary The document discusses the use of GDP growth rates in DCF models for regulated utilities, cautioning against using analyst growth estimates that exceed GDP growth. It references past decisions and highlights the need to align growth assumptions with realistic GDP projections, as seen in Concentric's DCF estimates.

9. Approved ROE In determining a reasonable ROE, the Authority considers the analytical models for commensurate utility returns, allowed ROEs in other jurisdictions, the prevailing market conditions, and the Company's risk profile. The Aut...

AI summary The Authority determines a reasonable Return on Equity (ROE) for the Company by evaluating analytical models (DCF and CAPM), market conditions, and the Company's financial profile. The DCF model suggests an ROE range of 8.70% to 9.60%, while the CAPM model suggests 8.05% to 9.86%. Considering the Company's financial stability and regulatory environment, the Authority adopts a 9.45% ROE.

1 DCF results are based on 90-day average stock prices for proxy group companies. Results include 50 basis points for flotation costs and financial flexibility except for U.S. risk premium results.

AI summary The DCF results are calculated using 90-day average stock prices for proxy group companies, with an additional 50 basis points for flotation costs and financial flexibility, excluding U.S. risk premium results.

3.7.3.2 DCF Models [486] The DCF model infers the required rate of return by replicating the actions of an investor in valuing the firm's securities by estimating the dividend yield and future growth rate. [487] Based on its assessment of...

AI summary The DCF model estimates the required rate of return by replicating investor actions, using dividend yield and growth rate. Concentric and Dr. Cleary provided different ROE estimates under their DCF analyses, with Concentric determining 9.02% and Dr. Cleary estimating 7.86%.

3.7.5.1 Return on Equity [514] A utility's return on equity must be consistent with the fair return standard. There is no single test for determining an appropriate return on equity. Both experts in this proceeding used a variety of models...

AI summary The document discusses determining a utility's return on equity (ROE) using multiple models, with experts averaging results. Dr. Cleary emphasizes equal weighting of CAPM and BYPRP methods over DCF due to their conceptual advantages and intuitive nature, citing direct links to financing costs and market risk adjustments.

3.7.5.1 Return on Equity [514] A utility's return on equity must be consistent with the fair return standard. There is no single test for determining an appropriate return on equity. Both experts in this proceeding used a variety of models...

AI summary The document discusses determining a utility's return on equity using models like CAPM and BYPRP, with experts averaging results. Dr. Cleary emphasizes CAPM's conceptual advantages and direct financing cost link, while also weighting BYPRP due to its intuitive nature and wider use by Canadian CFOs. The Board acknowledges experts' use of multiple approaches to inform their recommendations.

NSP COST OF CAPITAL PANEL 495 Questions, (Murphy) 1 Q. Sure. 16 COYNE: Yes, it would be MR. 17 everything across the board. So it would be everything 18 from interest rates to ––– 19 MEMBER DEVEAU: Yeah. INTERNATIONAL REPORTING INC. CERTIF...

AI summary The discussion focuses on the determination of interest rates, specifically 30-year bond yields, used in the DCF model for calculating the cost of capital. The participant clarifies that these rates are based on long-term forecasts and consensus economic data, not central bank rates, and emphasizes the need for comprehensive updates rather than piecemeal adjustments.

NSP COST OF CAPITAL PANEL Questions, (Deveau) 1 A. (Coyne) You're welcome. 8 appropriate; that, as I understand your evidence, it is 9 not only inappropriate, but necessary to include the 10 American data to give good results in your analy...

AI summary The NSP Cost of Capital Panel is discussing the use of American data in the analysis of return on equity (ROE) calculations. The panel is examining the impact of including a broader North American proxy group versus restricting the analysis to Canadian companies, with a focus on the results of the DCF and CAPM methods.