Pennichuck Water Special Committee

REPORT OF THE PENNICHUCK WATER SPECIAL COMMITTEE JANUARY 6, 2011 A meeting of the Pennichuck Water Special Committee was held on Thursday, January 6, 2011 at 6:34 p.m. in the Aldermanic Chamber. Alderman-at-Large Brian S. McCarthy presided. Members of the Committee present: Alderman-at-Large Barbara Pressly Alderman-at-Large Mark S. Cookson Alderman Michael J. Tabacsko, Arrived after Roll Call at 6:55 pm Alderman Jeffrey T. Cox Also in Attendance: Alderman-at-Large Ben Clemons Alderman Arthur T. Craffey, Jr. Alderman Mary Ann Melizzi-Golja Alderman Richard P. Flynn Alderman Paul M. Chasse, Jr. Alderman-at-Large David W. Deane, Arrived at 6:45 p.m. Alderman Richard LaRose, Arrived at 6:55 p.m. Mayor Donnalee Lozeau James M. McNamee, Corporation Counsel Chair McCarthy It's been our practice in this committee to suspend the rules to allow everybody to vote that is here. I think we had talked about that in the past and wasn't clear we needed to do that tonight because this would go back to the full Board. I am willing to handle it however the pleasure of the committee is. Do we want to make that motion again? Alderman Cookson I don't think it is necessary. I think the committee can make the determination on the particular resolution and then move forward with a recommendation to the full board. UNFINISHED BUSINESS - None Pennichuck Water Special Committee -2- 01/06/11 NEW BUSINESS - RESOLUTIONS R-10-81 Endorsers: Mayor Donnalee Lozeau Alderman-at-Large Brian S. McCarthy Alderman-at-Large Ben Clemons Alderman Kathy Vitale Alderman-at-Large Barbara Pressly Alderman Richard LaRose Alderman Michael J. Tabacsko Alderman Mary Ann Melizzi-Golja Alderman Jeffrey T. Cox Alderman Diane Sheehan Alderman-at-Large Lori Wilshire Alderman Richard P. Flynn FINDING THAT THE ACQUISITION OF STOCK, RATHER THAN THE DIRECT ACQUISITION OF THE PLANT AND PROPERTY OF PENNICHUCK CORPORATION WILL PROVIDE A MORE ORDERLY METHOD FOR THE CITY TO ESTABLISH, OWN, AND OPERATE A MUNICIPAL WATER UTILITY CONSISTENT WITH THE PURPOSES OF RSA 38 AND WILL BE FINANCIALLY BENEFICIAL TO THE CITY AND ITS CUSTOMERS AND WILL, THEREFORE, BE IN THE BEST INTERESTS OF THE CITY AND PROVIDE A PUBLIC BENEFIT MOTION BY ALDERMAN PRESSLY TO RECOMMEND FINAL PASSAGE ON THE QUESTION Chairman McCarthy I think Mr. Gottlieb would like to address us, and Mr. Patenaude. Arthur Gottlieb As part of this resolution there are two findings of fact. These are items which we have discussed many times during the course of this process. I was asked, and I think it made sense, to perhaps just summarize a little bit the backup for these two required findings of fact. First that the acquisition of stock, rather than the direct acquisition of plant and property, will provide a more orderly method for the city to establish its water utility. And the second that the acquisition of stock, rather than the direct acquisition of plant and property will be more financially beneficial. Again, I don't believe there's any new information on the following slides, but it is a good summary in this more public setting and for the record. In terms of the orderly method, today, as it exists, Pennichuck Corporation operates three regulated utilities, a water services company as an integrated whole. There's also a land operations which a) is not truly an operational and b) is not truly integrated. But the operating business is in four corporate entities who really do operate across all of the entities. If the city had proceeded with eminent domain, it was only authorized to purchase Pennichuck water Works. Certainly our view, and I think the view generally, is that that would have created some significant financial and operating problems. First is that it was not clear what the fate of the employees would have been had the city extracted PWW, extracted the water works from the parent company and in fact some might have been retained, some might have been lost in the transition. It was just not clear how the PWW, as a stand-alone Pennichuck Water Special Committee -3- 01/06/11 entity would have been operated. The second is that the two remaining utilities, the ones that were left behind in the parent company in Pennichuck Corporation would not have been economically viable on their own. That the city had made plans, more reasonable plans to address the operating issue for PWW, by hiring a third-party operator. And the PUC had addressed the "orphan" utilities issue by requiring a $40 million mitigation fund. Again that fund was in place to deal with the fact that those two utilities on their own were going to have serious operating problems. What we have moved forward with to this date is the stock acquisition under which all of Pennichuck Corporation, the city would become the sole shareholder of the Pennichuck Corporation of the parent company and all of its subsidiaries and operations would remain in tact. In terms of orderliness, this is about as orderly as you can get. All the subsidiaries would continue to benefit from integrated operations. All three utilities would continue as they are today to be regulated by the PUC, so no disruption there. The current operating management will continue to run the business. All the current operating employees will continue to maintain and operate facilities,. The customers of all these SUbsidiaries, all ofthe water customer of Pennichuck Corporation, would continue to receive exactly the same services from the same people. In short, the stock acquisition is in fact the least disruptive way for the city to take control of its water resources. The second finding of fact, the second issue, was will this acquisition of stock be more financially beneficial than the eminent domain taking. Again, these are things that everyone has been aware of for a very long time. Under the eminent domain proceeding, and especially as re-affirmed by the Supreme Court earlier last year, Nashua would have paid a total of $243 million for just the assets of Pennichuck Water Works. Under the stock acquisition, Nashua will pay roughly $138 million for all of the shares and assume about $60 million in debt for a total price of $198 million. There are a couple of few very big differences between those two. First of all, obviously, there's the $45 million difference. But in addition under the acquisition of the corporation, under the purchase of stock, Nashua ends up owning all of the assets, instead of just the assets of Pennichuck Water Works, which is to say all three utilities: the water services company, and I think of great importance to this group and to the citizens, the land owned by Pennichuck. All of that undeveloped land, some of which is watershed land, some of which is not, is now going to be owned by the city as the shareholder of Pennichuck Corporation. Finally, as mentioned before, there really are operating benefits that come from having a single operation spread across these separate subsidiaries and the cost benefits of those integrated operations remain in place. That discussion was just thinking about financial benefit of buying stock versus eminent domain. The other part is the second question of even if one is better than the other is buying stock better than the status quo, better than leaving things as they are today strictly from a financial benefit point of view. The simple summary of that is: will ratepayers benefit from the transaction as opposed to leaving things the way they are today. We've again gone through this analysis on a number of occasions with the aldermen. Our belief, we are confident in fact, that the rates for ratepayers will be lower under city ownership than they would have been under current ownership. The difference will be small to begin with, but will in fact grow over time. The reasons for that are relatively simple. Simply put, expenses will be lower. We strongly believe operating expenses will be lower under city ownership than they would be under current ownership, and the required return on capital as future investment are made will also be lower under city ownership than they would be under current ownership. Finally, although we believe, the city is confident of this, and we believe we made a good case of these beliefs with the city, ultimately the public utilities commission will determine if this transaction truly is in the best financial interest of ratepayers and that will be part of the presentation we will be making to the PUC, again assuming we proceed with this over the next few months. Pennichuck Water Special Committee -4- 01/06/11 I don't know if anyone has any questions of me, but that's the end of my presentation. Alderman Cookson My question would be around the bond market and what's happening with the bond market now and potential based on the Bush tax extension. Could we possibly see inflation and what that would mean to the potential purchase or selling of municipal bonds. Arthur Gottlieb I'll answer it to the extent I can which is that within the merger agreement that has been signed by the City and by Pennichuck, there is a ceiling on the interest rate of 6.5 percent. If when the city goes out to sell bonds and to raise the monies necessary for the transaction, if the interest rate is above 6.5 percent, the city has the option of deciding not to proceed. I think that question will really depend very much on again whether or not in fact whatever interest rate is in effect at that time is the deal still financially beneficial to the ratepayers. The rates right now, there was a little bit of a bump up in rates at the end of last year. I think it is partly due to the fact that because of what's happening with federal fiscal policy that there's a sense that in fact growth will accelerate. If growth accelerates than perhaps interest rates will go up. It's very hard to know where things will be 6 - 9 months from now. All I can say, though, is that the city has a very clean exit in the event that interest rates are not attractive at the time the transaction must be done. Alderman Cookson I would open this up whom would that question be appropriate to and when might we be able to get an answer to that question? Chairman McCarthy If we find somebody that can answer that question, I have a much better use to put them to than answering it. Basically requires some amount of clairvoyance to understand where the rates will be. Alderman Cookson I certainly appreciate the levity that you bring to it, but we have to understand what's happening globally and we have to understand what's happening in Europe right now and in Ireland, in Portugal, in Spain. That truly does impact the municipal bonds and the selling of those bonds. In fact, I believe that Japan just sold bonds where they didn't want to maintain that debt, a municipal bond. This truly does have an impact on this. Is the treasurer available? Is our chief financial officer available? Would they be able to comment on the question. Chairman McCarthy They are here, and I'll invite them to comment. I think the answer we're going to get is ... Arthur Gottlieb But if I might, there's a sub question there, which is that I believe the PUC will only approve this transaction in the event that the resulting rates are beneficial to the ratepayers. So in fact if the interest rates are such that the resulting rates would not be beneficial to the ratepayers ... the answer gets Pennichuck Water Special Committee -5- 01/06/11 given when you know what the rates are going to be. So I believe it self corrects. If interest rates are so high that the ratepayers wouldn't benefit from the deal then the PUC would not approve. Chairman McCarthy Does that address your question? Alderman Cookson Yes, it does. Thank you. Chairman McCarthy I don't think there's anybody that can tell us with any authority what is going to happen with the interest rates, but we are ... Alderman Cookson I just want to make sure that we are watching it and we understand what that impact is having on those rates. Alderman Pressly If I'm reading what is before us, the real question is: Is it sort of okay if we have a stock purchase rather than a cash purchase. For those of us who have been around the eight years, and I know that Alderman Deane, our president, and who else has been around the eight years? We asked this question eight years ago. Why can't we buy the stock? We were told: No, you cannot. So all the different gyrations that have taken place over these eight years is what they have finally come up with is exactly what the citizens' group asked for at the very beginning. It was merely a change of ownership from a corporation to a municipality where everything stayed the same. Although those of us who fought hard and made presentations and told people what we want is a fair price to buy the company and keep it the way it is. So this allows us to do exactly what those of us who went to the public and asked for support and put up the signs, it is wonderful that it has come down this way. Thank you to those who have brought it about that we can, in fact, purchase the stock. I am extremely supportive of this. I think it'd be easy to make the case to the public that what we're giving them today, or what we're voting on today is exactly what was presented to them eight years ago when they voted. I think I'm very comfortable with this change and the way that we are purchasing. Chairman McCarthy I just want to point out for our listening audience that when that question was first asked, we could not buy that stock, and that the Alderman Pressly That's correct. It's interesting that it has taken eight years to work this out. But initially that was one of the things that the citizens' group was saying. Just buy the stock. So, we're basically getting what we had hoped to get. It just took a long time, but that's okay. We're getting it. Pennichuck Water Special Committee -6- 01/06/11 Alderman Flynn All through these slides, there's three or four slides, there are very strong and good bullet points. Things that we all understand and agree with. This last bullet is probably as important as any bullet to me. We're all interested in preserving our water rights and being good caretakers, stewards, whatever, those are good things certainly. But the last one where the PUC will determine if this transaction is the best financial interest of the ratepayers that's a very keen element, I think, to many of us. That little dialogue we had where we were talking about PUC would not approve this if the interest rates made the deal unattractive or had no advantage to the ratepayers, first off, I envision we're going to go to the PUC. Myself, I'm very interested in hoping that we would pursue getting the full $6 million back and returned to the taxpayers of the City of Nashua. I don't envision that as we get to the final determination of whether this is a good decision for the ratepayers or not, that the PUC of New Hampshire makes that decision, I don't envision that there is going to be any bartering or bargaining that we will take the $6 million off the table because we want this deal to go through and it changes the grid or the slope or the curve. I don't think that's going to be part of the way this is handled at the PUC. I think we give the.PUC what are plan is, and if it's not what they agree to, do we come back to this committee and talk about what we're willing to compromise? If the deal fail because the rate is too high, does someone make a compromise at the last minute or does it come back to this board to decide what those compromises will be? Arthur Gottlieb Typically what would happen is we will make our presentation to the PUC. They will review it and make testimony. They may have a number of points that they want addressed. They may indicate that certain expenses won't be allowable or will be allowable. They would make the recommendations based on that. Then we would have to come back and let you all know what the recommendations of the PUC are as well. Alderman Flynn So that discussion will come back to this board before the final determination by PUC? Arthur Gottlieb Unless it flows through without any changes, but that's not ... Alderman Flynn But we are going up there with the full, I believe, at least at this time, that there is a resolve to go up there and try to get that full $6 million returned to the taxpayers of Nashua. Arthur Gottlieb Currently, yes. Alderman Flynn Is that still pretty much the consensus of what the Board has passed on to the negotiation team? Pennichuck Water Special Committee -7- 01/06/11 Arthur Gottlieb That's our understanding, yes. Alderman Flynn One other thing, at least speaking for myself, and I think you get your opinions sometimes from people that you associate with, talking with people whether you're out for breakfast or whatever, you know. I think there's still a feeling that citizens, and certainly I'm including myself, I'm speaking for myself, with the idea of the city running a water company. In this particular scenario the city really doesn't run a water company. It's the board of directors, I think, that are going to run the water company. I think that might be a little bit of a something more that you could speak a little bit to because I think people still see this as a choice of words, but it's still looks like the city is running a water company. I'd like if could speak just a little bit to that. Arthur Gottlieb I could do it now or I could do it in the presentation in the next meeting. Alderman Flynn It was one of the bullets, that's why. One of the bullets said that the city had decided not to bring in a third party operator. Arthur Gottlieb Exactly. Alderman Flynn So it makes it really look like really the city is almost running this water company. Arthur Gottlieb The company, itself, the operating side of it, will be continued to be run by the people that are running it today. People calling in for customer service or dealing with repairs will be talking to the same people before and after. As far as the management of the company, itself, it will be a board of directors. We've said between 7 and 13 board members. Those members will be running the company. Management will report to that board of directors. Other than the first year, the board of directors will propose a slate to the sole shareholders for approval of new members. It's a staggered board. Every third year, there's new members coming on. Also,this board was very conscious about having members on the board who were not members of this group or any other pUblic group within the communities served by Pennichuck. So in that sense it is a pure, independent board. Alderman Flynn I just want to say thank you for that. Apparently you have another presentation later on that covers a lot more of this in depth, but because that bullet was up there and it talked about no third party operator, I wanted to just get a little bit more in front of the public on whatever it might be on the television or whatever. Get a little bit more information in front of the public that this is not arranged for Pennichuck Water Special Committee -8- 01/06/11 the city to operate a water company. It's not another city department, and there's no intention of the city to try to run the water company. That's how I'm reading this. Thank you. Chairman McCarthy Before I recognize Alderman Pressly, I wanted to comment for the record because I forgot to do it at the beginning, Alderman Tabacsko has joined us. Also present from the Board are Alderman Clemons, Alderman Craffey, Alderman Deane, Alderman LaRose, Alderman Melizzi-Golja, Alderman Chasse and Alderman Flynn. Alderman Pressly I'd just like to comment that over seven of these eight years I've been a citizen intervener, and I've attended every single PUC meeting. I can assure you that the consumer advocate has been watching the cost of this from both sides. The consumer advocate division is actually separate from the PUC. They have an arm's length relationship so they do not have to go along with the PUC. They are well aware of this. Many of us who were interveners repeatedly brought up the subject that we, the ratepayers and the citizens of Nashua, were paying for both sides and our frustrations with this. I have to feel that they will be as fair as they can and will, in fact, do their very, very best to protect the public interest regarding - it's probably $11,000 now between both sides. I feel that that is going to be dealt with as fairly as they are able to do. The other thing, the PUC over the years have been very pleased with the product that Pennichuck has delivered. I think we, as a community, we've never really complained about the delivery system. The problem was the ownership and the fact that they wanted to have out-of-state and out-of-country people own and continue to get a profit. I believe having attended all those meetings, and interacted with the staff on numerous occasions, that they will be very pleased with this also. And it is because they have monitored this company over the years. They've made suggestions and changes to make sure the delivery system has been good and adequate. They have faith in the people who have been running it, not the owners necessarily, but the ones that have actually run the company. I feel positive that there is a good possibility that it will go through the PUC faster than we think because of the way this has been put together. We are keeping the same people that they have trusted over the years and are well aware, we want the people to be paid back for the cost of the acquisition and the debate that has gone on for this length of time. So I am very hopeful. In fact, I intend to attend most of the meetings once they take place and continue to be involved up at the PUC. Thank you. I feel more positive than the consultants do that they will be pleased with this and that the amount of money that paid for the eminent domain battle, the consumer advocate division will be watching that very closely. Alderman Cookson I had just a question about this particular resolution and was curious about the timing of it. Is it in fact a prerequisite to any other piece of legislation or in particular the $220 million bonding legislation. Is it a prerequisite or a co requisite? Chairman McCarthy I believe it's a co requisite in terms of our filings with the PUC, but I'll ask Mr. Patenaude or Mr. Ardinger. Pennichuck Water Special Committee -9- 01/06/11 Attorney Ardinger The question you ask is ultimately a legal one. The source for these two findings of fact is in state legislation that was passed by the state legislature in 2007 and then an amendment in 2010. That was the legislation that authorized the city to resolve this dispute by purchasing the shares of stock. That legislation says that without these two findings of fact by the full board of aldermen - without them making that - the transaction cannot occur. Then we move on to the issuance of the bonds. Obviously the transaction cannot occur unless this Board of Aldermen authorizes the issuance of financing that would pay all the costs. I think the direct answer, even though there may be two different sources, is that they are co requisites. Without the findings of these facts by you, without the authorization of the bonds by you, the full board - not the committee but the full board - the transaction cannot go forward. Alderman Cookson And the finding of facts that we see in this particular resolution, they are the opinion of the consultants. Is that correct? Arthur Gottlieb They certainly reflect the opinions of the consultants. They are ultimately the facts agreed to, I believe, by the aldermen. But yes, they represent our opinion. Alderman Pressly So if I understand it, this resolution merely allows us to authorize to purchase by stock the company which is probably the first step to finalize the whole transaction. Alderman Cookson I was just going to ask, through corporation counsel, is that statement correct? Attorney McNamee Substantially that is correct, yes. These two specific findings are the precise wording of the special legislation that was passed that authorizes us to acquire the stock of Pennichuck Corporation. It says we can acquire the stock of Pennichuck Corporation as long as you make these two findings. Chairman McCarthy Any other questions, comments? The motion before the committee is to recommend final approval of Resolution R-10-81 to the full Board of Aldermen. Alderman Pressly For the record, roll call please. A viva voce roll call was taken on the motion which resulted as follows: Yea: Alderman Pressly, Alderman Tabacsko, Alderman Cox Alderman McCarthy 4 Pennichuck Water Special Committee ~1 0- 01/06/11 Nay: Alderman Cookson 1 MOTION CARRIED NEW BUSINESS ~ ORDINANCES - None ADJOURNMENT MOTION BY ALDERMAN TABACSKO TO ADJOURN MOTION CARRIED The Pennichuck Water Special Committee meeting was adjourned at 7:02 p.m. Alderman Jeffrey T. Cox Committee Clerk  -III o :J 3 r+ 3 o tn m n -III OJ 3  Fi nd i n-e:s III R ulr • That the acquisition of stock, rather than the direct acquisition of plant and property, will provide a more orderly method for the city to establish, own, and operate a municipal water utility consistent with the purposes of RSA 38m • That the acquisition of stock} rather than the direct acquisition of plant and pr.operty will be financially beneficial to the city and its customers and will, therefore, be in the best interests of the city and provide a public benefit.  r rl thad • Today, Pennichuck Corporation operates its three regulated utilities and its water services company as an integrated whole. • Under Eminent Domain, the City was authorized to purchase only one regulated utility, Pennichuck Water Works. • This approach would have created significant financial and operating problems: - Critical operating employees and management would have been lost. - The remaining two regulated utilities would not have been economically viable on their own. • The City planned to address the operating issue by hiring a third-party operators • The PUC addressed the "orphan" utilities issue with a $40 million mitigation fund.  rderly th (cantin ) e Under the stock acquisition, all Pennichuck Corporation subsidiaries and operations remain intact. e All subsidiaries will continue to benefit from integrated operations. e AU three water utilities will continue to be regulated by the PUC. e Current operating management will continue to run the business. e Current employees will continue to maintain and operate the facilities. e Customers of all subsidiaries will continue to receive the same services from the same people. • In short; the stock acquisition will cause little or no disruption for customers or employees. Financial nefit liD Under the Eminent Domain proceeding, Nashua would have paid a total of $243 million ($203 million for PWW plus $40 million for the mitigation fund). • Under the stock acquisition, Nashua will pay $138 million for the shares and assume about $60 million in debt for a total of about $198 million. • The stock acquisition has the following financial benefits for Nashua and its customers as compared to the eminent domain taking: - Lower total cost ($198 million vs. $243 million). - More assets acquired (all three utilities} plus the water services company, plus the land owned by Pennichuck). - Retain cost benefits of integrated operations.  inancial fit (conti nued) • The related question is: Will ratepayers benefit from this transaction as ,compared to the status quo? • Our analysis shows rates for all ratepayers will be lower under City ownership than they would have been under current ownership. • We have presented our analysis to the Board of Aldermen and to the public. • That presentation will be made again later today. 4» Ultimately! the PUC will determine if this transaction is in the best financial interests of ratepayers. A positive determination is required for their approval.