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Table 41 Merchant Generation Company Return on Equity Merchant Generation Company NRGEnergy, Inc. CRnOn Energy Inc (fka RRIEnergy) Calpine Carp. GenOn Energy Holdings lnc (fka Mirant) Dynegy, Inc. ~~ Value-weighted Portfolio Average Risk Free Market Risk Beta Rate Premiuni W) PW 111 [21 [31 4.3% 6.5% 1.10 4.3% 6.5% 1.73 4.3% 6.5% 1.29 4.3% 6.5% 1.08 4.3% 6.5% 1.55 4.3% 6.5% 1.23 Return on WitY (%I [41 11.4% 15.6% 12.7% 11.3% 14.4% 12.3% Soiirces nrid Notes [I] 15-day average yield of 20-year US. Treasury Rate as of 4/25/20]1 from Bloomberg (201I). [2] Average of long-tenn equity risk premia of 6.7%and 6.3% from 1bbots0n~an~d Credit ~ u i s s e , ”re~spectively. [3] Five year average of Monday, Wednesday, and Friday weekly betas from Bloomberg (201 1). RRI Energy and Mirant betas are as of 4/9/2010, one week before merger announcement. Dynegy beta is as of 8/6/2010, one week before Blackstone’s tender offer. E41 UI + PI x 131. 6. Cost of Debt We estimated the cost of debt by compiling the unsecured senior credit ratings for each of the five merchant generation companies and examining bond yields associated with those credit ratings. InStandardandPoor’s(“S&P”)creditratings,acompanyreceivesahigherratingbased on its ability to meet its financial coimitments, with “MA”being the highest rating and “D” being the lowest.48 Table 42 shows the S&P credit rating, 5-year average long-term debt, and the corporate bond yield implied by the credit rating for each merchant generation company. The credit rating for four of the companies is “B” while NRG has a rating of “BB,” implying that these companies are more risky and vulnerable to adverse business, financial, and economic conditions than are top-rated companies. We calculate the industry bond yield of 8.1% by weighting each company’s bond yield by its 5-year average long-term debt. 46 Ibbotson (201l), Table A-1. 41 48 Dimson, et nl. (2010), Table 10. Standard &. Poor’s (201 1) 37PDF Image | THE APPLICATION OF KENTUCKY POWER
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