Capital Structure and Cost of Capital by ojp65951

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									                                                             Direct Testimony and Schedules
                                                                                Lisa J. Gast




                    Before the Minnesota Public Utilities Commission
                                  State of Minnesota




In the Matter of the Application of Minnesota Energy Resources Corporation for Authority to
                     Increase Rates for Natural Gas Service in Minnesota




                            Docket No. G007,011/GR-08-835
                                    Exhibit _____




                         Capital Structure and Cost of Capital




                                      July 31, 2008
                                  TABLE OF CONTESTS

I.     Introduction and Qualifications                 1

II.    Prior Commission Orders                         4

III.   Description of Exhibits                         8

IV.    Explanation of Changes to MERC’s Adjusted
       Common Equity from 2007 to 2008                14

V.     The Required Common Equity Ratio               16

VI.    The Required Return on Equity                  18

VII.   Conclusion                                     20
 1                        I. INTRODUCTION AND QUALIFICATIONS

 2   Q.   PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.

 3   A.   My name is Lisa J. Gast. My business address is Integrys Energy Group, Inc.

 4        (“Integrys”), 700 North Adams Street, P.O. Box 19001, Green Bay, WI 54307-9001.

 5

 6   Q.   BY WHOM ARE YOU EMPLOYED AND WHAT IS YOUR POSITION?

 7   A.   I am the Manager, Financial Planning and Analysis for Integrys Business Support, LLC

 8        (“IBS”). Both Minnesota Energy Resources Corporation (“MERC”) and IBS are wholly-

 9        owned subsidiaries of Integrys. Integrys resulted from the February 21, 2007 merger

10        between WPS Resources Corporation and Peoples Energy Corporation.

11

12   Q.   PLEASE SUMMARIZE YOUR QUALIFICATIONS AND EXPERIENCE.

13   A.   I graduated from the University of Wisconsin – Green Bay in 1984 with a Bachelor’s

14        Degree in Accounting. I received a Masters Degree in Business Administration from

15        the University of Wisconsin - Oshkosh in 1995. My professional designations are

16        Certified Public Accountant and Certified Treasury Professional. I joined the

17        Treasury Department at Wisconsin Public Service Corporation (“WPSC”) in April of

18        2001. In my current position I am responsible for the capital structure forecasts for

19        each of our regulated utilities.

20

21   Q.   FOR WHOM ARE YOU PROVIDING TESTIMONY?

22   A.   I am providing testimony on behalf of MERC. MERC is a Delaware corporation and a

23        wholly-owned subsidiary of Integrys.

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 1

 2   Q.   WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING?

 3   A.   The purpose of my Direct Testimony is to:

 4           1.   Present MERC’s capital structure and cost of capital for the 2007 historical year,
 5
 6           2.   Present MERC’s capital structure and cost of capital for the 2008 projected year;
 7
 8           3.   Present MERC’s capital structure and cost of capital for the 2008 proposed test
 9                year,
10
11           4.   Explain the differences in adjusted common equity between the 2007 historical
12                test year and the 2008 proposed test year,
13
14           5.   Describe the required Common Equity Ratio for the 2008 proposed test year,
15                MERC’s proposed cost of debt capital and MERC’s weighted average cost of
16                capital, and
17
18           6.   Describe the required Return on Common Equity (“ROE”) for the 2008 proposed
19                test year.
20

21   Q.   DOES MERC PRESENT ANY OTHER EVIDENCE ON COST OF CAPITAL?

22   A.   Yes, it does. Mr. Paul R. Moul of P. Moul & Associates provides evidence on MERC’s

23        cost of capital. He presents analytical studies employing various industry models to

24        derive his recommendation for the return on common equity that MERC is requesting in

25        this case.

26

27   Q.   IS MERC PUBLICLY OWNED?

28   A.   Yes, it is. Integrys holds 100% of the common stock of MERC. Integrys is traded on the

29        New York Stock Exchange under the symbol “TEG”.

30




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1   Q.   PLEASE SUMMARIZE YOUR TESTIMONY AND RECOMMENDATIONS TO THE

2        COMMISSION.

3   A.   For the 2008 proposed test year, MERC requests that the Commission approve an overall

4        cost of capital of 8.5136%. This cost of capital is based on a common equity ratio of

5        49.9452% for the test year, and an 11.25% cost of common equity as supported in my

6        testimony and in the testimony of Mr. Paul R. Moul. My recommendation is summarized

7        in Exhibit _____ (LJG-2), Schedule D-1. The recommended capital structure and return

8        on equity will ensure that MERC has access to capital at reasonable rates when MERC

9        needs it, thereby benefiting its customers.




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 1                             II. PRIOR COMMISSION ORDERS

 2   Q.   DID THE COMPANY HAVE ANY COMPLIANCE REQUIREMENTS RELATED TO

 3        THE CAPITAL STRUCTURE AND COST OF CAPITAL IN THIS PROCEEDING?

 4   A.   The Commission’s Order Accepting and Adopting Settlement in Docket No. G-007,

 5        011/GR-00-951, Order Point 15 (July 29, 2003) states:

 6               In the next rate case filing, the Companies shall include the information
 7               set forth below, required in the Commission's February 14, 2003 Order
 8               Approving Joint Recommendation, In the Matter of an Inquiry Into
 9               Possible Effects of the Financial Difficulties at Aquila, Inc. on Peoples
10               Natural Gas Company and Northern Minnesota Utilities Company,
11               Docket No. G-007,011/CI-02-1369:

12               (a) identify all issuances of debt and associated costs from January 1,
13               2002, until the next rate case in a manner that will facilitate a potential
14               adjustment to mitigate the impact of adverse market factors caused by
15               Aquila's financial problems. Specifically, Aquila shall provide
16               information sufficient to allow the Commission to evaluate what the debt
17               and equity costs for Peoples and NMU would have been but for the effects
18               of Aquila’s other operations; and

19               (b) provide a discussion and analysis of the effects of Aquila's financial
20               situation on Peoples' and NMU's cost of common equity.

21

22   Q.   HAS DOCKET G007,011/CI-02-1369 BEEN CLOSED?

23   A.   Yes, it has. On March 14, 2008, the Commission issued its Order Accepting Reports,

24        Closing Docket, and Changing Procedural Framework in Docket G007,011/CI-02-1369,

25        acknowledging the Commission’s approval of the sale of Peoples Natural Gas (“PNG”)

26        and Northern Minnesota Utilities (“NMU”) to MERC. That order accepted the quarterly

27        service quality reports that had been filed by Aquila, Inc. in the first half of 2006 and by

28        MERC after MERC acquired PNG and NMU on July 1, 2006, then closed the

29        investigation. Because of the acquisition and the closing of this docket, MERC


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 1        respectfully suggests that the requirements in Docket No. G-007, 011/GR-00-951, Order

 2        Point 15 are no longer relevant to determining the cost of capital in this general rate case.

 3

 4   Q.   PLEASE SUMMARIZE MERC’S CAPITALIZATION AT THE TIME OF

 5        ACQUISITION.

 6        MERC acquired the Minnesota natural gas operations of Aquila on July 1, 2006. On that

 7        day, the capitalization of the company was as follows:

          amounts in millions                         Cost
          Common Equity                 $ 231.3
          less: Goodwill                  (159.1)
          Regulatory Equity             $   72.2     11.71% (a)
          LT NP Assoc Co WPSR*              87.0      6.28% (b)
          NP Assoc Co WPSR*                 15.0      5.40% (c)
          Regulatory Capital            $ 174.2

          * now Integrys
          (a) Allowed return per previous rate case
          (b) per Intercompany loan agreements / 360 * 365
          (c) this rate is equal to what Integrys pays for its outstanding
             commercial paper and varies with the market,
 8           current rates are less than 3%



 9   Q.   PLEASE DESCRIBE MERC’S ANNUAL CAPITAL STRUCTURE FILINGS SINCE

10        ACQUIRING MERC-PNG AND MERC-NMU.

11   A.   MERC made its first capital structure filing on July 7, 2006, shortly after the date of

12        acquisition. In Docket No. G-007, 011/S-06-1013, the Commission approved MERC’s

13        requested common equity ratio for 2006, allowed MERC’s common equity to be within a

14        range of 44.6 to 54.5 percent, and authorized MERC to receive short- and long-term debt

15        from its parent company at rates that its parent would pay. In the Matter of the Annual

16        Capital Structure Filing of Minnesota Energy Resources Corporation, Docket No. G-

17        007, 011/S-06-1013, at 1 (April 25, 2007).
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 1

 2        MERC similarly received approval of its 2007 capital structure. See In the Matter of the

 3        Annual Capital Structure Filing of Minnesota Energy Resources Corporation, Docket

 4        No. G-007, 011/S-07-352, at 1 (July 31, 2007).

 5

 6   Q.   WHAT IS THE STATUS OF MERC’S CAPITAL STRUCTURE FILING FOR 2008?

 7   A.   MERC filed its petition on March 20, 2008. The Office of Energy Security (“OES”)

 8        reviewed the filing and recommended approval of MERC’s requested common equity

 9        ratio, with an allowed range of 43.2 to 52.8 percent. The OES also requested that MERC

10        file reply comments justifying MERC’s short term debt ratio and the reasonableness of

11        MERC’s cost of short-term debt from Integrys. See OES Comments, In the Matter of the

12        Annual Capital Structure Filing of Minnesota Energy Resources Corporation, Docket

13        No. G-007, 011/S-08-329 (May 12, 2008). MERC filed Reply Comments addressing the

14        issues raised by the OES on May 22, 2008. The OES has since recommended that the

15        commission approve MERC’s capital structure petition. See OES Reply Comments, In

16        the Matter of the Annual Capital Structure Filing of Minnesota Energy Resources

17        Corporation, Docket No. G-007, 011/S-08-329 (July 21, 2008). This matter has not yet

18        been brought before the Commission for decision.

19

20   Q.   HOW HAS MERC RESPONDED TO THE OES’ COMMENTS?

21   A.   MERC demonstrated that its short-term debt ratio is equal to the median of the short-term

22        debt ratio of local distribution companies (“LDC”) in Edward Jones Natural Gas Industry

23        Summary, Distribution category. MERC addressed the cost of intercompany versus

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1   external borrowing for short-term debt, concluding that it is feasible that MERC could

2   issue short-term debt of its own, but the cost is estimated to be 50 to 90 basis points more

3   than what it is currently paying via the intercompany agreement with Integrys. See

4   MERC Reply Comments in Docket No. G-007, 011/S-08-329 (May 22, 2008). Further

5   explanation for how the intercompany rates for the long-term debt issues were set is

6   included in Section III.




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 1                              III. DESCRIPTION OF EXHIBITS

 2   Q.   WHAT EXHIBITS ARE YOU SPONSORING IN THIS PROCEEDING?

 3   A.   I am sponsoring Schedules D-1 through D-5 of Exhibit _____ (LJG-1), Schedules D-1

 4        through D-5 of Exhibit _____ (LJG-2), Schedules D-1 through D-5 of Exhibit _____

 5        (LJG-3), and Exhibit _____ (LJG-4) along with the associated Workpapers.

 6

 7   Q.   WERE THE EXHIBITS PREPARED BY YOU OR UNDER YOUR SUPERVISION?

 8   A.   Yes, they were.

 9

10   Q.   PLEASE EXPLAIN SCHEDULES D-1 THROUGH D-5 OF Exhibit _____ (LJG-1).

11   A.   In general, Schedules D-1 through D-5 of Exhibit _____ (LJG-1) support and calculate

12        MERC’s capital structure, cost of capital, and required rate of return for the 2007

13        historical year.

14

15        Schedule D-1 develops MERC’s 2007 historical year overall rate of return of 8.7904%

16        based on MERC’s 13-month average capital structure, and an 11.71% ROE.

17

18        Schedule D-2 develops MERC’s 2007 historical year embedded cost of long-term debt of

19        6.2827%, based on a 13-month average.

20

21        Schedule D-3-1 develops MERC’s 2007 historical year cost of short-term debt of

22        3.9659%, based on a 13-month average.

23

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 1        Schedule D-3-2 develops MERC’s 2007 historical year cost of customer deposits and

 2        other interest bearing balance sheet items of 8.261%, based on a 13-month average.

 3

 4        Schedule D-4 indicates that MERC has no preferred equity outstanding.

 5

 6        Schedule D-5 develops MERC’s 13-month average balance of Adjusted Common Equity

 7        for the 2007 historical year.

 8

 9   Q.   PLEASE EXPLAIN SCHEDULES D-1 THROUGH D-5 OF Exhibit _____ (LJG-2).

10   A.   In general, Schedules D-1 through D-5 of Exhibit _____ (LJG-2) support and calculate

11        MERC’s capital structure, cost of capital, and required rate of return for the 2008

12        proposed test year.

13

14        Schedule D-1 develops MERC’s 2008 proposed test year overall rate of return of

15        8.5136% based on MERC’s 13-month average capital structure, and an 11.25% ROE.

16

17        Schedule D-2 develops MERC’s 2008 proposed test year embedded cost of long-term

18        debt of 6.2827%, based on a 13-month average.

19

20        Schedule D-3-1 develops MERC’s 2008 proposed test year cost of short-term debt of

21        3.1115%, based on a 13-month average.

22




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 1        Schedule D-3-2 develops MERC’s 2008 proposed test year cost of customer deposits and

 2        other interest bearing balance sheet items of 3.3%, based on a 13-month average.

 3

 4        Schedule D-4 indicates that MERC has no preferred equity outstanding.

 5

 6        Schedule D-5 develops MERC’s 13-month average balance of Adjusted Common Equity

 7        for the 2008 proposed test year. MERC requests an 11.25% ROE for the 2008 proposed

 8        test year in this rate case proceeding as per Mr. Moul’s analysis.

 9

10   Q.   PLEASE EXPLAIN SCHEDULES D-1 THROUGH D-5 OF Exhibit _____ (LJG-3).

11   A.   In general, Schedules D-1 through D-5 of Exhibit _____ (LJG-3) support and calculate

12        MERC’s capital structure, cost of capital, and required rate of return for the 2008

13        projected year.

14

15        Schedule D-1 develops MERC’s 2008 projected year overall rate of return of 8.6136%

16        based on MERC’s 13-month average capital structure, and an 11.25% ROE.

17

18        Schedule D-2 develops MERC’s 2008 projected year embedded cost of long-term debt of

19        6.2827%, based on a 13-month average.

20

21        Schedule D-3-1 develops MERC’s 2008 projected year cost of short-term debt of 4.8%,

22        based on a 13-month average.

23

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 1        Schedule D-3-2 develops MERC’s 2008 projected year cost of customer deposits and

 2        other interest bearing balance sheet items of 3.3%, based on a 13-month average.

 3

 4        Schedule D-4 indicates that MERC has no preferred equity outstanding.

 5

 6        Schedule D-5 develops MERC’s 13-month average balance of Adjusted Common Equity

 7        for the 2008 projected year.

 8

 9   Q.   PLEASE EXPLAIN Exhibit _____ (LJG-4).

10   A.   Exhibit _____ (LJG-4) presents the 2007 actual and 2008 budgeted capital structure and

11        cost of capital for Integrys on a consolidated basis.

12

13   Q.   HOW WERE THE RATES FOR THE INTERCOMPANY LONG-TERM DEBT FROM

14        INTEGRYS ESTABLISHED?

15   A.   The long-term agreements were established on July 1, 2006 – the date of MERC’s

16        acquisition of Aquila’s Minnesota natural gas operations. July 1 was a Saturday, and the

17        rates used for the agreements were the June 30, 2006 benchmark Treasury rates, plus a

18        reoffer spread and a issue fee spread applicable to Integrys’ credit strength. These

19        spreads were determined by polling 3 investment banking firms and averaging the results.

20        See the table below for a summary of the rates by maturity.




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 1


                                              7 Year - 2013 10 Year - 2016          15 Year – 2021

          Benchmark Treasury Rate                 5.11%             5.14%                5.14%

          Average Reoffer Spread                  0.81%             0.93%                1.18%

          Average Issue Fee Spread                0.11%             0.09%                0.08%

          All-In Fixed Rate (360 day)
          Stated Rate in Agreements               6.03%             6.16%                6.40%

          / 360 x 365
          Effective Rate (rounded)                6.11%             6.25%                6.49%
 2


 3   Q.   WHAT WERE INTEGRYS’ CREDIT RATINGS ON JUNE 30, 2006?

 4   A.   Integrys’ (WPS Resources at that time) senior unsecured debt was rated “A” by Standard

 5        & Poor’s and “A1” by Moody’s.

 6

 7   Q.   WHAT WERE AQUILA’S CREDIT RATINGS ON JUNE 30, 2006?

 8   A.   Aquila’s senior unsecured debt was rated “B-” by Standard & Poor’s and “B2” by

 9        Moody’s.

10

11   Q.   WHY WAS THIS APPROACH TAKEN FOR THE LONG-TERM DEBT

12        ISSUANCES?

13   A.   This approach is used by Integrys to provide long-term financing to its smaller

14        subsidiaries on a cost effective basis. Due to the relatively small size of debt offerings

15        that its smaller subsidiaries could place into the financial markets, Integrys determined

16        the most cost effective way to finance these companies was to issue intercompany loans
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 1        with fixed terms and fixed rates at the estimated rate that it could attain for larger, higher

 2        rated financings. The smaller subsidiaries have benefited with economics that they could

 3        not have achieved on their own due to the small size of debt issuances and, in the case of

 4        MERC, lack of track record as a stand-alone corporation. Smaller issues of unrated

 5        utilities would typically see higher transaction costs and size premiums that apply to

 6        smaller issuances. This approach has provided long-term financing to Integrys’ smaller

 7        subsidiaries at a lower cost than they could achieve from an external third party.

 8

 9   Q.   HOW WERE THE RATES FOR THE INTERCOMPANY SHORT-TERM DEBT

10        FROM INTEGRYS FORECASTED?

11   A.   Integrys provides short-term debt to MERC at its cost of external commercial paper.

12        Integrys’ commercial paper rating is “A-2” from Standard & Poor’s and “P-2” from

13        Moody’s. The forecasted short-term debt rate was derived from the Economy.com

14        March 12, 2008 forecast for one month commercial paper. This was the current forecast

15        at the time the 2008 projections were created.




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                                                                     Docket No. G007,011/GR-08-835
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 1                    IV. EXPLANATION OF CHANGES TO MERC’S
 2                   ADJUSTED COMMON EQUITY FROM 2007 TO 2008

 3   Q.   PLEASE EXPLAIN WHY MERC’S YEAR END ADJUSTED COMMON EQUITY

 4        INCREASED FROM $93,135,188 FOR THE 2007 HISTORICAL TEST YEAR TO

 5        $115,613,324 FOR THE 2008 ADJUSTED TEST YEAR.

 6   A.   The change in MERC’s year end adjusted common equity is mainly due to retained

 7        earnings and equity infusions from Integrys. MERC has projected earnings of

 8        $12,883,019, net equity infusions of $5,000,000, and a reduction of utility equity

 9        adjustments of $4,595,117 from December 31, 2007 through December 31, 2008. As

10        MERC’s asset base grows, equity infusions are needed in order to maintain the desired

11        equity ratio to total capital. MERC’s actual common equity balance at December 31,

12        2007 was $93,135,188.

13

14        A summary of the above described changes to MERC’s adjusted common equity is

15        shown below:


                                    Summary of Changes to MERC’s
                                       Adjusted Common Equity

             Actual 12/31/07                                          $93,135,188
             Earnings                                                 $12,883,019
             Net Equity Infusions                                     $5,000,000
             Reduced Utility Equity Adjustments *                     $ 4,595,117

             Forecast 12/31/08                                       $115,613,324
16




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1   * In addition to equity infusions – reductions to utility equity adjustments also result in

2   an increase in adjusted common equity. For 2008, $3,761,789 of adjusted equity is

3   created by deferred tax cash flows related to goodwill and $833,328 is created by

4   amortization of customer lists




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 1                          V. THE REQUIRED COMMON EQUITY RATIO

 2   Q.   WHAT COMMON EQUITY RATIO IS REQUIRED FOR MERC?

 3   A.   A common equity ratio of 50% – 55 % (after considering adjustments related to non-

 4        utility investments) is required to provide MERC the financial health and flexibility it

 5        needs to respond to the changes and challenges of the utility industry.

 6

 7        MERC is currently targeting a common equity ratio of 49.9452% for the 2008 proposed

 8        test year. During the 2007 historical test year, MERC maintained a 47.5885% common

 9        equity ratio. This 49.9452% equity ratio compares to an average ratio of 48.7% (48% at

10        12/31/08) requested with the 2008 MERC Capital Structure Filing, and is well within the

11        range of 43.2% - 52.8% requested. The 2008 Capital Structure Filing was completed

12        with a version of data between the time the budget was developed and when this rate case

13        was developed, due to the timing of the filing. MERC’s board of directors has approved

14        a monthly common equity range of 40% - 65%, with an average equity target of 50% -

15        55%.

16

17        Business risk is greater today than in earlier decades and this increased business risk is

18        reflected in the more stringent benchmarks now being used by the various credit rating

19        agencies. See Section II of Paul Moul’s testimony for a discussion of the current factors

20        affecting business risk for natural gas utilities. Business risk can be offset somewhat with

21        decreased financial risk by maintaining a lower debt ratio (and a higher common equity

22        ratio) which in-turn increases interest coverage. Interest coverage is an indication of the

23        amount of cash flow required to make interest payments. A lower debt ratio, leads to

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 1        lower interest payments, and higher interest coverage – indicating decreased financial

 2        risk.

 3

 4   Q.   WHAT BENEFITS DOES A CAPITAL STRUCTURE WITH AN ADEQUATE

 5        COMMON EQUITY RATIO PROVIDE?

 6   A.   An adequate common equity ratio provides MERC with the ability to resist negative

 7        financial pressures, and creates a buffer to protect against unexpected adverse

 8        developments, so that distortions can be quickly remedied without impairing either the

 9        orderly conduct of the business or the credit quality of present or future securities

10        issuances. As market volatility occurs, as it has in the past 12 months, those companies

11        with higher financial risk are subject to higher interest rate volatility than those

12        companies with lower financial risk. Maintaining an adjusted common equity ratio in the

13        50% - 55% range will help ensure that MERC’s financial risk is at a level that will enable

14        it to access capital at reasonable rates when MERC needs it, thereby benefiting its

15        customers.




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 1                    VI. THE REQUIRED RETURN ON COMMON EQUITY

 2   Q.   WHAT IS MERC’S RECOMMENDATION FOR THE ROE FOR THE 2008

 3        PROPOSED TEST YEAR?

 4   A.   MERC is requesting an 11.25% ROE for the 2008 proposed test year as described in the

 5        direct testimony of Paul R. Moul.

 6

 7   Q.   IS THE MARKET RESPONSIVE TO ALTERNATIVE INVESTMENT

 8        OPPORTUNITIES?

 9   A.   Yes, it is. Investors have a full field of investment choices. Investors can choose the

10        stock market or other markets such as bonds, treasury securities, money funds, real estate,

11        etc. If investors choose the stock market, they may elect a utility stock or a stock from

12        one of the many other industries available. If investors prefer utilities, they have many to

13        select from within the utility industry. Therefore, it is imperative to provide a

14        competitive return to the shareholder. The return on a utility's stock must be competitive

15        given its risk profile as compared to other investment alternatives.

16

17        An adequate ROE is of major importance and benefit to customers. Adequate returns on

18        MERC's common equity would help to ensure continued reliable utility services, and

19        would assure these services are provided at the lowest overall rates through the lowest

20        overall cost of capital. This can only be maintained with an adequate ROE.

21

22   Q.   WHAT EFFECT WOULD AN ADEQUATE ROE HAVE ON THE OTHER

23        SECURITIES OF MERC?

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 1   A.   An adequate ROE would permit MERC to raise capital when needed, at reasonable rates,

 2        especially during periods of “tight” credit markets. An adequate ROE is a positive way

 3        of ensuring MERC’s ability to continue to provide safe, reliable and cost effective energy

 4        services to its customers.

 5

 6   Q.   IN SUMMARY, WHAT IS YOUR RECOMMENDATION REGARDING THE

 7        REQUIRED COMMON EQUITY RATIO AND THE REQUIRED ROE FOR THE 2008

 8        PROPOSED TEST YEAR?

 9   A.   MERC recommends that the average common equity ratio be set at 49.9452% with a

10        ROE of 11.25%. These values are recommended because:

11               1. They are necessary to provide a fair return to investors commensurate with
12                  competitive investment vehicles available,

13               2. There is a notable increase in business risk associated with the increased
14                  uncertainty in the utility industry, and

15               3. They recognize that MERC has delivered, and will continue to deliver,
16                  reliable service at a reasonable cost to its customers. Therefore, the
17                  shareholder should be properly compensated for delivering on its commitment
18                  to those customers.




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1                                     VI. CONCLUSION

2   Q.   IN YOUR OPINION, DOES THE CAPITAL STRUCTURE AND COST OF CAPITAL

3        PROVIDE A REASONABLE BASIS FOR ESTABLISHING RATES IN THIS CASE?

4   A.   Yes. The Capital Structure and Cost of Capital is reasonable and supports the revenue

5        increase MERC has requested in this case.

6

7   Q.   DOES THIS CONCLUDE YOUR TESTIMONY ON CAPITAL STRUCTURE AND

8        COST OF CAPITAL?

9   A.   Yes, it does.




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1MN
                                   PART I   SECTION A

                                                                                          Docket No.:   G007,011/GR-08-835
                                                                                          Exhibit:_____(LJG-1) Schedule:   D-1




                        MINNESOTA ENERGY RESOURCES CORPORATION
                            Overall Rate of Return Summary
                                     Historic, Dec. 31, 2007
      __________________________________________________________________________



                                                          Capital Structure                             %           %
                                                   ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯                 WEIGHTED    WEIGHTED
                                                                    % AMT     % AMT           COST   COST OF     COST OF
                                                                  OF PERM OF TOTAL            RATE PERMANENT       TOTAL
      LINE       DESCRIPTION         SOURCE              AMOUNT   CAPITAL   CAPITAL            %     CAPITAL     CAPITAL
      ¯¯¯¯   ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯     ¯¯¯¯¯¯¯¯      ¯¯¯¯¯¯¯¯¯¯¯¯ ¯¯¯¯¯¯¯¯ ¯¯¯¯¯¯¯¯         ¯¯¯¯¯¯¯¯ ¯¯¯¯¯¯¯¯     ¯¯¯¯¯¯¯¯
                      (a)              (b)                 (c)       (d)       (e)            (f)       (g)         (h)

        1    Long Term Debt          Sch D-2        -87,000,000      45.4933    46.2463     6.2827    2.8582      2.9055

        2    Short Term Debt         Sch D-3-1      -13,230,208       6.9182     7.0327     3.6959    0.2557      0.2599

        3    Preferred Stock         Sch D-4                    0     0.0000     0.0000   100.0000    0.0000      0.0000

        4    Adj. Common Equity      Sch D-5        -91,006,803      47.5885    48.3762    11.7100     5.5726     5.6649
                                                   ¯¯¯¯¯¯¯¯¯¯¯¯     ¯¯¯¯¯¯¯¯                         ¯¯¯¯¯¯¯¯

        5         Subtotal                         -191,237,011     100.0000                           8.6865
                                                   ============     ========                         ========


        6    Other Interest Bearing
               Balance Sheet Items Sch D-3-2            1,153,029               ¯0.6129    ¯8.2610                 0.0506

        7    Deferred Income Taxes Sch B-1                      0                0.0000     0.0000                 0.0000

        8    Def. Inv. Tax Credit    Sch B-1                    0                0.0000     8.6865                 0.0000

        9    JDITC                   Sch B-1                    0                0.0000     8.6865                 0.0000

       10    Capital Structure Adj WPD1-1             1,960,826                 ¯1.0423     8.6865                ¯0.0905
                                                   ¯¯¯¯¯¯¯¯¯¯¯¯                ¯¯¯¯¯¯¯¯                          ¯¯¯¯¯¯¯¯
       11         TOTAL                            -188,123,156                100.0000                            8.7904
                                                   ============                ========                          ========




             NOTE:   Capital structure cost in Column (f), represent costs
                     as found on sources listed in Column (b).
                     Except for the costs on lines 8 "Def. Inv. Tax Credit",
                     9 "JDITC", and 10 "Capital Structure Adj" which are equal
                     to the total weighted cost of permanent capital on lines 1-4.
                     (See ITC adj Ex A-2 Sch WPC1-1i1.)




                          May not cross-check due to rounding
1MN
                                   PART I   SECTION A

                                                                                          Docket No.:   G007,011/GR-08-835
                                                                                          Exhibit:_____(LJG-1) Schedule:   D-2




                        MINNESOTA ENERGY RESOURCES CORPORATION
                                 Long-Term Debt Cost
                                    Historic, Dec. 31, 2007
      __________________________________________________________________________



                                                         AMOUNT
                                                             OF         PRICE       UNDER-
                                             DATE      OFFERING            TO      WRITERS
      LINE     DESCRIPTION (ACCOUNT)         SOLD        ($000)        PUBLIC        COMP.
      ¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯
                                             (a)           (b)           (c)          (d)

        1     6.03%   Due 07/13 223001a(1) 07/06          29000      29000000            0
        2     6.16%   Due 07/16 223001b(2) 07/06          29000      29000000            0
        3     6.40%   Due 07/21 223001c(3) 07/06          29000      29000000            0
                                                       ¯¯¯¯¯¯¯¯     ¯¯¯¯¯¯¯¯¯     ¯¯¯¯¯¯¯¯
             TOTALS                                       87000      87000000            0
                                                       ========     =========     ========

                                                    COST BASED
                    EXPENSES      NET PROCEEDS          ON NET     AVERAGE(4)
                          OF       RECEIVED BY        PROCEEDS         AMOUNT       ANNUAL
      LINE         FINANCING       THE COMPANY           (%)      OUTSTANDING         COST
      ¯¯¯¯       ¯¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯      ¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯
                        (e)               (f)             (g)            (h)          (i)

        1                  0          29000000           6.11        29000000      1771900
        2                  0          29000000           6.25        29000000      1812500
        3                  0          29000000           6.49        29000000      1882100
                 ¯¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯                    ¯¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯
                           0          87000000                       87000000      5466500
                 ===========    ==============                    ===========    =========

                                             Average Balance      -87,000,000

                                         Calculated Interest        5,466,500

                       Amort of Prem/Expense (Accts 428xxx)                 0

                                     Reconcile Bond Int (5)              -524
                                                                   ----------
                       Total Interest Expense (Acct 430999)         5,465,976
                                                                   ==========

                                         Average Cost of LTD           6.2827%



       (1) Long Term Credit Agreement with Integrys Energy Group, Inc.

       (2) Long Term Credit Agreement with Integrys Energy Group, Inc.

       (3) Long Term Credit Agreement with Integrys Energy Group, Inc.

       (4) Average balances calculated by dividing the beginning
           and ending monthly balances by 24.

       (5) Interest Expense is calculated on the monthly outstanding balance.
           The revenue requirements model uses a 13-month average when calculating
           annual interest costs. Differences result between general ledger and
           the jurisdictional model when notes are issued and/or retired during the
           year. The "Reconcile Bond Int" amount adjusts for the difference when this
           situation occurs.

                          May not cross-check due to rounding
1MN
                                     PART I   SECTION A

                                                                                  Docket No.:   G007,011/GR-08-835
                                                                                  Exhibit:_____(LJG-1) Schedule:   D-3-1




                        MINNESOTA ENERGY RESOURCES CORPORATION
                           Weighted Cost of Short Term Debt
                                    Historic, Dec. 31, 2007
      __________________________________________________________________________




                                                  AMOUNT                         INTEREST
                                             OUTSTANDING       INTEREST      REQUIREMENTS
      LINE               ISSUE             (Acct 233001)           RATE     (Acct 430001)
      ¯¯¯¯        ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯        ¯¯¯¯¯¯¯¯¯¯¯       ¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯
                          (a)                    (b)             (c)            (d)

                  Short Term Debt:
        1   Dec                                -27,000,000
        2   Jan                                -25,700,000
        3   Feb                                -19,400,000
        4   Mar                                 -5,600,000
        5   Apr                                 -6,200,000
        6   May                                          0
        7   Jun                                          0
        8   Jul                                          0
        9   Aug                                 -8,400,000
       10   Sep                                -15,475,000
       11   Oct                                -19,325,000
       12   Nov                                -28,625,000
       13   Dec                                -33,075,000
                                               ¯¯¯¯¯¯¯¯¯¯¯      ¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯
       14    Average Balance                   -13,230,208       ¯3.6959           488,975
                                               ===========      ========    ==============




                         May not cross-check due to rounding
1MN
                                  PART I    SECTION A

                                                                                    Docket No.:   G007,011/GR-08-835
                                                                                    Exhibit:_____(LJG-1) Schedule:   D-3-2




                        MINNESOTA ENERGY RESOURCES CORPORATION
                        Weighted Cost of Customer Deposits and
                      Other Interest Bearing Balance Sheet Items
                                    Historic, Dec. 31, 2007
      __________________________________________________________________________




                                              AMOUNT           INTEREST         INTEREST
      LINE              ISSUE               OUTSTANDING          RATE         REQUIREMENTS
      ¯¯¯¯       ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯        ¯¯¯¯¯¯¯¯¯¯¯        ¯¯¯¯¯¯¯¯      ¯¯¯¯¯¯¯¯¯¯¯¯¯¯
                         (a)                    (b)              (c)              (d)

        1    Average Customer Deposits        -605,304 (1)        5.00 (2)       -30,265


             Other Interest Bearing
                Balance Sheet Items:

             LESS:
        2    Temporary Cash                 1,758,333            3.70            64,986
                                           ¯¯¯¯¯¯¯¯¯¯¯                       ¯¯¯¯¯¯¯¯¯¯¯

        3       Net Other Interest Bearing
                    Balance Sheet Items    1,758,333                             -64,986


                                           ¯¯¯¯¯¯¯¯¯¯¯                       ¯¯¯¯¯¯¯¯¯¯¯

        4    Total                           1,153,029           ¯8.26           -95,251
                                           ===========        ========       ===========




          Sources:
      (1) Ex A-2 Sch B-3-2
      (2) Per Rate Schedule




                        May not cross-check due to rounding
1MN
                                    PART I    SECTION A

                                                                                            Docket No.:   G007,011/GR-08-835
                                                                                            Exhibit:_____(LJG-1) Schedule:   D-4




                        MINNESOTA ENERGY RESOURCES CORPORATION
                                 Preferred Stock Cost
                                    Historic, Dec. 31, 2007
      __________________________________________________________________________



                                                                   FEES &                              NET
                                     ANNUAL                       EXPENSE         DISCOUNT        PROCEEDS
                                   DIVIDEND          PAR               OF               OR              TO
      LINE      DESCRIPTION        REQUIRED         VALUE       FINANCING        (PREMIUM)         COMPANY
      ¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯      ¯¯¯¯¯¯¯¯       ¯¯¯¯¯¯¯       ¯¯¯¯¯¯¯¯¯        ¯¯¯¯¯¯¯¯¯       ¯¯¯¯¯¯¯¯¯
                    (a)                (b)           (c)             (d)              (e)             (f)

        1     0.00%   Series           0.00             0             0.00            0.00            0.00
        2     0.00%   Series           0.00             0             0.00            0.00            0.00
        3     0.00%   Series           0.00             0             0.00            0.00            0.00
        4     0.00%   Series           0.00             0             0.00            0.00            0.00
        5     0.00%   Series           0.00             0             0.00            0.00            0.00

        6    TOTALS

                       NUMBER
                           OF     TOTAL VALUE                         ANNUAL
                       SHARES          OF NET              COST       DOLLAR
      LINE             ISSUED    PROCEEDS (1)           RATE(2)    AMOUNT(3)      ACCOUNT
      ¯¯¯¯             ¯¯¯¯¯¯   ¯¯¯¯¯¯¯¯¯¯¯¯¯           ¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯     ¯¯¯¯¯¯¯¯
                         (g)             (h)               (i)          (j)          (k)

        8                   0                 0             0.00             0
        9                   0                 0             0.00             0
       10                   0                 0             0.00             0
       11                   0                 0             0.00             0
       12                   0                 0             0.00             0

       13    TOT            0                 0                              0

       14    COST                                         100.0000

      --------------------------------------------------------------------------
      Note (1) The "Total Value of Net Proceeds" (see above column h)
                is the remaining balance per issue as of the end of the
                test year.

      Note (2)      The "Cost Rate" (see above column i), is obtained by dividing
                    the "Annual Dividend Required Per Share" (col b) by the
                    "Net Proceeds Per Share to Company" (col f).

      Note (3)      The "Annual Dollar Amount" (see above column j), is obtained
                    by multiplying the "Outstanding Balance" (col h) by the
                    "Cost Rate" (col i).

                           May not cross-check due to rounding
1MN
                                   PART I   SECTION A

                                                                                Docket No.:   G007,011/GR-08-835
                                                                                Exhibit:_____(LJG-1) Schedule:   D-5




                        MINNESOTA ENERGY RESOURCES CORPORATION
                                Cost of Common Equity
                                    Historic, Dec. 31, 2007
      __________________________________________________________________________



                                          Adjusted
                                            Common
                                             Stock
                        Ln                (WPD6-1)
                        ¯¯            ¯¯¯¯¯¯¯¯¯¯¯¯

                         1   Dec       -86,115,077
                         2   Jan       -88,818,038
                         3   Feb       -91,836,054
                         4   Mar       -94,333,561
                         5   Apr       -93,150,765
                         6   May       -92,113,464
                         7   Jun       -91,159,383
                         8   Jul       -91,107,325
                         9   Aug       -90,548,054
                        10   Sep       -89,497,706
                        11   Oct       -89,682,928
                        12   Nov       -90,209,223
                        13   Dec       -93,135,188

                                      ¯¯¯¯¯¯¯¯¯¯¯¯
                        14 Ave         -91,006,803



                                           Cost of
                                            Common
                                            Equity
                                      ¯¯¯¯¯¯¯¯¯¯¯¯

                        15                   11.71%
                                      ============



                       May not cross-check due to rounding
1MN
                                   PART I   SECTION A

                                                                                         Docket No.:   G007,011/GR-08-835
                                                                                         Exhibit:_____(LJG-2) Schedule:   D-1




                        MINNESOTA ENERGY RESOURCES CORPORATION
                            Overall Rate of Return Summary
                                    Proposed, Dec. 31, 2008
      __________________________________________________________________________



                                                          Capital Structure                            %           %
                                                   ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯                WEIGHTED    WEIGHTED
                                                                    % AMT     % AMT          COST   COST OF     COST OF
                                                                  OF PERM OF TOTAL           RATE PERMANENT       TOTAL
      LINE       DESCRIPTION         SOURCE              AMOUNT   CAPITAL   CAPITAL           %     CAPITAL     CAPITAL
      ¯¯¯¯   ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯     ¯¯¯¯¯¯¯¯      ¯¯¯¯¯¯¯¯¯¯¯¯ ¯¯¯¯¯¯¯¯ ¯¯¯¯¯¯¯¯        ¯¯¯¯¯¯¯¯ ¯¯¯¯¯¯¯¯     ¯¯¯¯¯¯¯¯
                      (a)              (b)                 (c)       (d)       (e)           (f)       (g)         (h)

        1    Long Term Debt          Sch D-2        -87,000,000     42.4800    43.6517     6.2827    2.6689      2.7425

        2    Short Term Debt         Sch D-3-1      -15,513,317      7.5748     7.7837     3.1115    0.2357      0.2422

        3    Preferred Stock         Sch D-4                   0     0.0000     0.0000   100.0000    0.0000      0.0000

        4    Adj. Common Equity      Sch D-5       -102,288,842     49.9452    51.3227    11.2500     5.6188     5.7738
                                                   ¯¯¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯                         ¯¯¯¯¯¯¯¯

        5         Subtotal                         -204,802,159    100.0000                           8.5234
                                                   ============    ========                         ========


        6    Other Interest Bearing
               Balance Sheet Items Sch D-3-2            -374,371                0.1878     3.3000                 0.0062

        7    Deferred Income Taxes Sch B-1                     0                0.0000     0.0000                 0.0000

        8    Def. Inv. Tax Credit    Sch B-1                   0                0.0000     8.5234                 0.0000

        9    JDITC                   Sch B-1                   0                0.0000     8.5234                 0.0000

       10    Capital Structure Adj WPD1-1             5,871,457                ¯2.9460     8.5234                ¯0.2511
                                                   ¯¯¯¯¯¯¯¯¯¯¯¯               ¯¯¯¯¯¯¯¯                          ¯¯¯¯¯¯¯¯
       11         TOTAL                            -199,305,073               100.0000                            8.5136
                                                   ============               ========                          ========




             NOTE:   Capital structure cost in Column (f), represent costs
                     as found on sources listed in Column (b).
                     Except for the costs on lines 8 "Def. Inv. Tax Credit",
                     9 "JDITC", and 10 "Capital Structure Adj" which are equal
                     to the total weighted cost of permanent capital on lines 1-4.
                     (See ITC adj Ex A-2 Sch WPC1-1i1.)




                          May not cross-check due to rounding
1MN
                                   PART I   SECTION A

                                                                                          Docket No.:   G007,011/GR-08-835
                                                                                          Exhibit:_____(LJG-2) Schedule:   D-2




                        MINNESOTA ENERGY RESOURCES CORPORATION
                                 Long-Term Debt Cost
                                    Proposed, Dec. 31, 2008
      __________________________________________________________________________



                                                         AMOUNT
                                                             OF         PRICE       UNDER-
                                             DATE      OFFERING            TO      WRITERS
      LINE     DESCRIPTION (ACCOUNT)         SOLD        ($000)        PUBLIC        COMP.
      ¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯
                                             (a)           (b)           (c)          (d)

        1     6.03%   Due 07/13 223001a(1) 07/06          29000      29000000            0
        2     6.16%   Due 07/16 223001b(2) 07/06          29000      29000000            0
        3     6.40%   Due 07/21 223001c(3) 07/06          29000      29000000            0
                                                       ¯¯¯¯¯¯¯¯     ¯¯¯¯¯¯¯¯¯     ¯¯¯¯¯¯¯¯
             TOTALS                                       87000      87000000            0
                                                       ========     =========     ========

                                                    COST BASED
                    EXPENSES      NET PROCEEDS          ON NET     AVERAGE(4)
                          OF       RECEIVED BY        PROCEEDS         AMOUNT       ANNUAL
      LINE         FINANCING       THE COMPANY           (%)      OUTSTANDING         COST
      ¯¯¯¯       ¯¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯      ¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯
                        (e)               (f)             (g)            (h)          (i)

        1                  0          29000000           6.11        29000000      1771900
        2                  0          29000000           6.25        29000000      1812500
        3                  0          29000000           6.49        29000000      1882100
                 ¯¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯                    ¯¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯
                           0          87000000                       87000000      5466500
                 ===========    ==============                    ===========    =========

                                             Average Balance      -87,000,000

                                         Calculated Interest        5,466,500

                       Amort of Prem/Expense (Accts 428xxx)                 0

                                     Reconcile Bond Int (5)              -524
                                                                   ----------
                       Total Interest Expense (Acct 430999)         5,465,976
                                                                   ==========

                                         Average Cost of LTD           6.2827%



       (1) Long Term Credit Agreement with Integrys Energy Group, Inc.

       (2) Long Term Credit Agreement with Integrys Energy Group, Inc.

       (3) Long Term Credit Agreement with Integrys Energy Group, Inc.

       (4) Average balances calculated by dividing the beginning
           and ending monthly balances by 24.

       (5) Interest Expense is calculated on the monthly outstanding balance.
           The revenue requirements model uses a 13-month average when calculating
           annual interest costs. Differences result between general ledger and
           the jurisdictional model when notes are issued and/or retired during the
           year. The "Reconcile Bond Int" amount adjusts for the difference when this
           situation occurs.

                          May not cross-check due to rounding
1MN
                                     PART I   SECTION A

                                                                                  Docket No.:   G007,011/GR-08-835
                                                                                  Exhibit:_____(LJG-2) Schedule:   D-3-1




                        MINNESOTA ENERGY RESOURCES CORPORATION
                           Weighted Cost of Short Term Debt
                                    Proposed, Dec. 31, 2008
      __________________________________________________________________________




                                                  AMOUNT                         INTEREST
                                             OUTSTANDING       INTEREST      REQUIREMENTS
      LINE               ISSUE             (Acct 233001)           RATE     (Acct 430001)
      ¯¯¯¯        ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯        ¯¯¯¯¯¯¯¯¯¯¯       ¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯
                          (a)                    (b)             (c)            (d)

                  Short Term Debt:
        1   Dec                                -33,075,000
        2   Jan                                -21,531,462
        3   Feb                                -15,714,680
        4   Mar                                -11,538,163
        5   Apr                                -12,845,651
        6   May                                -11,906,958
        7   Jun                                   -209,430
        8   Jul                                 -5,586,231
        9   Aug                                 -8,960,268
       10   Sep                                -14,767,493
       11   Oct                                -18,751,405
       12   Nov                                -35,785,186
       13   Dec                                -24,050,752
                                               ¯¯¯¯¯¯¯¯¯¯¯      ¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯
       14    Average Balance                   -15,513,317       ¯3.1115           482,691
                                               ===========      ========    ==============




                         May not cross-check due to rounding
1MN
                                  PART I    SECTION A

                                                                                    Docket No.:   G007,011/GR-08-835
                                                                                    Exhibit:_____(LJG-2) Schedule:   D-3-2




                        MINNESOTA ENERGY RESOURCES CORPORATION
                        Weighted Cost of Customer Deposits and
                      Other Interest Bearing Balance Sheet Items
                                    Proposed, Dec. 31, 2008
      __________________________________________________________________________




                                              AMOUNT           INTEREST         INTEREST
      LINE              ISSUE               OUTSTANDING          RATE         REQUIREMENTS
      ¯¯¯¯       ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯        ¯¯¯¯¯¯¯¯¯¯¯        ¯¯¯¯¯¯¯¯      ¯¯¯¯¯¯¯¯¯¯¯¯¯¯
                         (a)                    (b)              (c)              (d)

        1    Average Customer Deposits        -374,371 (1)        3.30 (2)       -12,354


             Other Interest Bearing
                Balance Sheet Items:

             LESS:
        2    Temporary Cash                         0            3.11                 0
                                           ¯¯¯¯¯¯¯¯¯¯¯                       ¯¯¯¯¯¯¯¯¯¯¯

        3       Net Other Interest Bearing
                    Balance Sheet Items              0                                 0


                                           ¯¯¯¯¯¯¯¯¯¯¯                       ¯¯¯¯¯¯¯¯¯¯¯

        4    Total                            -374,371            3.30           -12,354
                                           ===========        ========       ===========




          Sources:
      (1) Ex A-2 Sch B-3-2
      (2) Per Rate Schedule




                        May not cross-check due to rounding
1MN
                                    PART I    SECTION A

                                                                                            Docket No.:   G007,011/GR-08-835
                                                                                            Exhibit:_____(LJG-2) Schedule:   D-4




                        MINNESOTA ENERGY RESOURCES CORPORATION
                                 Preferred Stock Cost
                                    Proposed, Dec. 31, 2008
      __________________________________________________________________________



                                                                   FEES &                              NET
                                     ANNUAL                       EXPENSE         DISCOUNT        PROCEEDS
                                   DIVIDEND          PAR               OF               OR              TO
      LINE      DESCRIPTION        REQUIRED         VALUE       FINANCING        (PREMIUM)         COMPANY
      ¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯      ¯¯¯¯¯¯¯¯       ¯¯¯¯¯¯¯       ¯¯¯¯¯¯¯¯¯        ¯¯¯¯¯¯¯¯¯       ¯¯¯¯¯¯¯¯¯
                    (a)                (b)           (c)             (d)              (e)             (f)

        1     0.00%   Series           0.00             0             0.00            0.00            0.00
        2     0.00%   Series           0.00             0             0.00            0.00            0.00
        3     0.00%   Series           0.00             0             0.00            0.00            0.00
        4     0.00%   Series           0.00             0             0.00            0.00            0.00
        5     0.00%   Series           0.00             0             0.00            0.00            0.00

        6    TOTALS

                       NUMBER
                           OF     TOTAL VALUE                         ANNUAL
                       SHARES          OF NET              COST       DOLLAR
      LINE             ISSUED    PROCEEDS (1)           RATE(2)    AMOUNT(3)      ACCOUNT
      ¯¯¯¯             ¯¯¯¯¯¯   ¯¯¯¯¯¯¯¯¯¯¯¯¯           ¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯     ¯¯¯¯¯¯¯¯
                         (g)             (h)               (i)          (j)          (k)

        8                   0                 0             0.00             0
        9                   0                 0             0.00             0
       10                   0                 0             0.00             0
       11                   0                 0             0.00             0
       12                   0                 0             0.00             0

       13    TOT            0                 0                              0

       14    COST                                         100.0000

      --------------------------------------------------------------------------
      Note (1) The "Total Value of Net Proceeds" (see above column h)
                is the remaining balance per issue as of the end of the
                test year.

      Note (2)      The "Cost Rate" (see above column i), is obtained by dividing
                    the "Annual Dividend Required Per Share" (col b) by the
                    "Net Proceeds Per Share to Company" (col f).

      Note (3)      The "Annual Dollar Amount" (see above column j), is obtained
                    by multiplying the "Outstanding Balance" (col h) by the
                    "Cost Rate" (col i).

                           May not cross-check due to rounding
1MN
                                   PART I   SECTION A

                                                                                Docket No.:   G007,011/GR-08-835
                                                                                Exhibit:_____(LJG-2) Schedule:   D-5




                        MINNESOTA ENERGY RESOURCES CORPORATION
                                Cost of Common Equity
                                    Proposed, Dec. 31, 2008
      __________________________________________________________________________



                                          Adjusted
                                            Common
                                             Stock
                        Ln                (WPD6-1)
                        ¯¯            ¯¯¯¯¯¯¯¯¯¯¯¯

                         1   Dec       -93,135,188
                         2   Jan      -107,432,173
                         3   Feb      -105,559,334
                         4   Mar      -100,172,140
                         5   Apr      -100,388,301
                         6   May       -91,877,050
                         7   Jun       -90,891,959
                         8   Jul       -94,633,619
                         9   Aug       -98,459,734
                        10   Sep      -106,672,377
                        11   Oct      -113,469,613
                        12   Nov      -113,535,548
                        13   Dec      -115,613,324

                                      ¯¯¯¯¯¯¯¯¯¯¯¯
                        14 Ave        -102,288,842



                                           Cost of
                                            Common
                                            Equity
                                      ¯¯¯¯¯¯¯¯¯¯¯¯

                        15                   11.25%
                                      ============



                       May not cross-check due to rounding
1MN
                                   PART I   SECTION A

                                                                                        Docket No.:   G007,011/GR-08-835
                                                                                        Exhibit:_____(LJG-3) Schedule:   D-1




                        MINNESOTA ENERGY RESOURCES CORPORATION
                            Overall Rate of Return Summary
                                   Projected, Dec. 31, 2008
      __________________________________________________________________________



                                                          Capital Structure                           %           %
                                                   ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯               WEIGHTED    WEIGHTED
                                                                    % AMT     % AMT         COST   COST OF     COST OF
                                                                  OF PERM OF TOTAL          RATE PERMANENT       TOTAL
      LINE       DESCRIPTION         SOURCE              AMOUNT   CAPITAL   CAPITAL          %     CAPITAL     CAPITAL
      ¯¯¯¯   ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯     ¯¯¯¯¯¯¯¯      ¯¯¯¯¯¯¯¯¯¯¯¯ ¯¯¯¯¯¯¯¯ ¯¯¯¯¯¯¯¯       ¯¯¯¯¯¯¯¯ ¯¯¯¯¯¯¯¯     ¯¯¯¯¯¯¯¯
                      (a)              (b)                 (c)       (d)       (e)          (f)       (g)         (h)

        1    Long Term Debt          Sch D-2        -87,000,000    45.9912    46.5258     6.2827    2.8895      2.9231

        2    Short Term Debt         Sch D-3-1      -11,260,542     5.9527     6.0219     4.8000    0.2857      0.2891

        3    Preferred Stock         Sch D-4                  0     0.0000     0.0000   100.0000    0.0000      0.0000

        4    Adj. Common Equity      Sch D-5        -90,906,190    48.0561    48.6148    11.2500     5.4063     5.4692
                                                   ¯¯¯¯¯¯¯¯¯¯¯¯   ¯¯¯¯¯¯¯¯                         ¯¯¯¯¯¯¯¯

        5         Subtotal                         -189,166,732   100.0000                           8.5815
                                                   ============   ========                         ========


        6    Other Interest Bearing
               Balance Sheet Items Sch D-3-2            212,934               ¯0.1139   ¯19.5943                 0.0223

        7    Deferred Income Taxes Sch B-1                    0                0.0000     0.0000                 0.0000

        8    Def. Inv. Tax Credit    Sch B-1                  0                0.0000     8.5815                 0.0000

        9    JDITC                   Sch B-1                  0                0.0000     8.5815                 0.0000

       10    Capital Structure Adj WPD1-1             1,960,826               ¯1.0486     8.5815                ¯0.0900
                                                   ¯¯¯¯¯¯¯¯¯¯¯¯              ¯¯¯¯¯¯¯¯                          ¯¯¯¯¯¯¯¯
       11         TOTAL                            -186,992,972              100.0000                            8.6136
                                                   ============              ========                          ========




             NOTE:   Capital structure cost in Column (f), represent costs
                     as found on sources listed in Column (b).
                     Except for the costs on lines 8 "Def. Inv. Tax Credit",
                     9 "JDITC", and 10 "Capital Structure Adj" which are equal
                     to the total weighted cost of permanent capital on lines 1-4.
                     (See ITC adj Ex A-2 Sch WPC1-1i1.)




                          May not cross-check due to rounding
1MN
                                   PART I   SECTION A

                                                                                          Docket No.:   G007,011/GR-08-835
                                                                                          Exhibit:_____(LJG-3) Schedule:   D-2




                        MINNESOTA ENERGY RESOURCES CORPORATION
                                 Long-Term Debt Cost
                                   Projected, Dec. 31, 2008
      __________________________________________________________________________



                                                         AMOUNT
                                                             OF         PRICE       UNDER-
                                             DATE      OFFERING            TO      WRITERS
      LINE     DESCRIPTION (ACCOUNT)         SOLD        ($000)        PUBLIC        COMP.
      ¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯
                                             (a)           (b)           (c)          (d)

        1     6.03%   Due 07/13 223001a(1) 07/06          29000      29000000            0
        2     6.16%   Due 07/16 223001b(2) 07/06          29000      29000000            0
        3     6.40%   Due 07/21 223001c(3) 07/06          29000      29000000            0
                                                       ¯¯¯¯¯¯¯¯     ¯¯¯¯¯¯¯¯¯     ¯¯¯¯¯¯¯¯
             TOTALS                                       87000      87000000            0
                                                       ========     =========     ========

                                                    COST BASED
                    EXPENSES      NET PROCEEDS          ON NET     AVERAGE(4)
                          OF       RECEIVED BY        PROCEEDS         AMOUNT       ANNUAL
      LINE         FINANCING       THE COMPANY           (%)      OUTSTANDING         COST
      ¯¯¯¯       ¯¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯      ¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯
                        (e)               (f)             (g)            (h)          (i)

        1                  0          29000000           6.11        29000000      1771900
        2                  0          29000000           6.25        29000000      1812500
        3                  0          29000000           6.49        29000000      1882100
                 ¯¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯                    ¯¯¯¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯
                           0          87000000                       87000000      5466500
                 ===========    ==============                    ===========    =========

                                             Average Balance      -87,000,000

                                         Calculated Interest        5,466,500

                       Amort of Prem/Expense (Accts 428xxx)                 0

                                     Reconcile Bond Int (5)              -524
                                                                   ----------
                       Total Interest Expense (Acct 430999)         5,465,976
                                                                   ==========

                                         Average Cost of LTD           6.2827%



       (1) Long Term Credit Agreement with Integrys Energy Group, Inc.

       (2) Long Term Credit Agreement with Integrys Energy Group, Inc.

       (3) Long Term Credit Agreement with Integrys Energy Group, Inc.

       (4) Average balances calculated by dividing the beginning
           and ending monthly balances by 24.

       (5) Interest Expense is calculated on the monthly outstanding balance.
           The revenue requirements model uses a 13-month average when calculating
           annual interest costs. Differences result between general ledger and
           the jurisdictional model when notes are issued and/or retired during the
           year. The "Reconcile Bond Int" amount adjusts for the difference when this
           situation occurs.

                          May not cross-check due to rounding
1MN
                                     PART I   SECTION A

                                                                                  Docket No.:   G007,011/GR-08-835
                                                                                  Exhibit:_____(LJG-3) Schedule:   D-3-1




                        MINNESOTA ENERGY RESOURCES CORPORATION
                           Weighted Cost of Short Term Debt
                                   Projected, Dec. 31, 2008
      __________________________________________________________________________




                                                  AMOUNT                         INTEREST
                                             OUTSTANDING       INTEREST      REQUIREMENTS
      LINE               ISSUE             (Acct 233001)           RATE     (Acct 430001)
      ¯¯¯¯        ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯        ¯¯¯¯¯¯¯¯¯¯¯       ¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯
                          (a)                    (b)             (c)            (d)

                  Short Term Debt:
        1   Dec                                -30,856,526
        2   Jan                                -17,645,832
        3   Feb                                -12,787,656
        4   Mar                                -13,473,138
        5   Apr                                   -184,532
        6   May                                          0
        7   Jun                                          0
        8   Jul                                 -3,799,011
        9   Aug                                 -3,727,234
       10   Sep                                 -8,746,091
       11   Oct                                -16,880,258
       12   Nov                                -28,993,655
       13   Dec                                -26,921,670
                                               ¯¯¯¯¯¯¯¯¯¯¯      ¯¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯
       14    Average Balance                   -11,260,542       ¯4.8000           540,507
                                               ===========      ========    ==============




                         May not cross-check due to rounding
1MN
                                  PART I    SECTION A

                                                                                    Docket No.:   G007,011/GR-08-835
                                                                                    Exhibit:_____(LJG-3) Schedule:   D-3-2




                        MINNESOTA ENERGY RESOURCES CORPORATION
                        Weighted Cost of Customer Deposits and
                      Other Interest Bearing Balance Sheet Items
                                   Projected, Dec. 31, 2008
      __________________________________________________________________________




                                              AMOUNT           INTEREST         INTEREST
      LINE              ISSUE               OUTSTANDING          RATE         REQUIREMENTS
      ¯¯¯¯       ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯        ¯¯¯¯¯¯¯¯¯¯¯        ¯¯¯¯¯¯¯¯      ¯¯¯¯¯¯¯¯¯¯¯¯¯¯
                         (a)                    (b)              (c)              (d)

        1    Average Customer Deposits        -388,914 (1)        3.30 (2)       -12,834


             Other Interest Bearing
                Balance Sheet Items:

             LESS:
        2    Temporary Cash                   601,848            4.80            28,889
                                           ¯¯¯¯¯¯¯¯¯¯¯                       ¯¯¯¯¯¯¯¯¯¯¯

        3       Net Other Interest Bearing
                    Balance Sheet Items        601,848                           -28,889


                                           ¯¯¯¯¯¯¯¯¯¯¯                       ¯¯¯¯¯¯¯¯¯¯¯

        4    Total                             212,934          ¯19.59           -41,723
                                           ===========        ========       ===========




          Sources:
      (1) Ex A-2 Sch B-3-2
      (2) Per Rate Schedule




                        May not cross-check due to rounding
1MN
                                    PART I    SECTION A

                                                                                            Docket No.:   G007,011/GR-08-835
                                                                                            Exhibit:_____(LJG-3) Schedule:   D-4




                        MINNESOTA ENERGY RESOURCES CORPORATION
                                 Preferred Stock Cost
                                   Projected, Dec. 31, 2008
      __________________________________________________________________________



                                                                   FEES &                              NET
                                     ANNUAL                       EXPENSE         DISCOUNT        PROCEEDS
                                   DIVIDEND          PAR               OF               OR              TO
      LINE      DESCRIPTION        REQUIRED         VALUE       FINANCING        (PREMIUM)         COMPANY
      ¯¯¯¯    ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯      ¯¯¯¯¯¯¯¯       ¯¯¯¯¯¯¯       ¯¯¯¯¯¯¯¯¯        ¯¯¯¯¯¯¯¯¯       ¯¯¯¯¯¯¯¯¯
                    (a)                (b)           (c)             (d)              (e)             (f)

        1     0.00%   Series           0.00             0             0.00            0.00            0.00
        2     0.00%   Series           0.00             0             0.00            0.00            0.00
        3     0.00%   Series           0.00             0             0.00            0.00            0.00
        4     0.00%   Series           0.00             0             0.00            0.00            0.00
        5     0.00%   Series           0.00             0             0.00            0.00            0.00

        6    TOTALS

                       NUMBER
                           OF     TOTAL VALUE                         ANNUAL
                       SHARES          OF NET              COST       DOLLAR
      LINE             ISSUED    PROCEEDS (1)           RATE(2)    AMOUNT(3)      ACCOUNT
      ¯¯¯¯             ¯¯¯¯¯¯   ¯¯¯¯¯¯¯¯¯¯¯¯¯           ¯¯¯¯¯¯¯    ¯¯¯¯¯¯¯¯¯     ¯¯¯¯¯¯¯¯
                         (g)             (h)               (i)          (j)          (k)

        8                   0                 0             0.00             0
        9                   0                 0             0.00             0
       10                   0                 0             0.00             0
       11                   0                 0             0.00             0
       12                   0                 0             0.00             0

       13    TOT            0                 0                              0

       14    COST                                         100.0000

      --------------------------------------------------------------------------
      Note (1) The "Total Value of Net Proceeds" (see above column h)
                is the remaining balance per issue as of the end of the
                test year.

      Note (2)      The "Cost Rate" (see above column i), is obtained by dividing
                    the "Annual Dividend Required Per Share" (col b) by the
                    "Net Proceeds Per Share to Company" (col f).

      Note (3)      The "Annual Dollar Amount" (see above column j), is obtained
                    by multiplying the "Outstanding Balance" (col h) by the
                    "Cost Rate" (col i).

                           May not cross-check due to rounding
1MN
                                   PART I   SECTION A

                                                                                Docket No.:   G007,011/GR-08-835
                                                                                Exhibit:_____(LJG-3) Schedule:   D-5




                        MINNESOTA ENERGY RESOURCES CORPORATION
                                Cost of Common Equity
                                   Projected, Dec. 31, 2008
      __________________________________________________________________________



                                          Adjusted
                                            Common
                                             Stock
                        Ln                (WPD6-1)
                        ¯¯            ¯¯¯¯¯¯¯¯¯¯¯¯

                         1   Dec       -96,063,512
                         2   Jan       -98,684,340
                         3   Feb       -90,820,386
                         4   Mar       -82,243,461
                         5   Apr       -82,650,020
                         6   May       -82,122,121
                         7   Jun       -81,284,984
                         8   Jul       -82,476,513
                         9   Aug       -91,750,876
                        10   Sep       -98,996,232
                        11   Oct       -99,128,386
                        12   Nov      -100,932,962
                        13   Dec      -103,504,493

                                      ¯¯¯¯¯¯¯¯¯¯¯¯
                        14 Ave         -90,906,190



                                           Cost of
                                            Common
                                            Equity
                                      ¯¯¯¯¯¯¯¯¯¯¯¯

                        15                   11.25%
                                      ============



                       May not cross-check due to rounding
                                                                            Docket No. G007,011/GR-08-835
                                                                                     Exhibit _____ (LJG-4)
                                                                                               Page 1 of 1

     Integrys Energy Group, Inc.
     Consolidated
     RATE OF RETURN COST OF CAPITAL SCHEDULES
     SUMMARY SCHEDULES
     ($000'S)

                                                           Percent                           Weighted
                                                           of Total           Cost of         Cost of
Line Capitalization                         Amount       Capitalization       Capital         Capital
                                              (a)             (b)              (c)             (d)
     TEST YEAR ENDED 12/31/07

 1   Long Term Debt                     $    2,100,426              36.4%           5.63%           2.00%

 2   Short Term Debt                          644,899               11.2%           7.19%           0.80%

 3   Long Term & Short Term Debt        $    2,745,325              47.6%           5.99%           2.90%

 4   Preferred Stock                            51,098               0.9%           6.10%           0.10%

 5   Common Equity                           2,972,170              51.5%          11.71%           6.00%

 6   Total Capitalization               $    5,768,593           100.0%                             9.00%



     BUDGETED YEAR ENDED 12/31/08

 7   Long Term Debt                     $    2,392,165              38.3%           5.63%           2.20%

 8   Short Term Debt                          552,289                8.9%           6.28%           0.60%

 9   Long Term & Short Term Debt        $    2,944,454              47.2%           5.75%           2.70%

10 Preferred Stock                              51,099               0.8%           6.10%           0.00%

11 Common Equity                             3,249,878              52.0%          11.25%           5.90%

12 Total Capitalization                 $    6,245,431           100.0%                             8.60%



     NOTES:
     All balances are 13 month averages.
     Short Term Debt interest expense includes "Other and AFUDC".
     Cost of Common Equity uses MERC's cost of equity.

								
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