Pennichuck Water Special Committee

REPORT OF THE PENNICHUCK WATER SPECIAL COMMITTEE JUNE 7, 2011 A meeting of the Pennichuck Water Special Committee was held on Tuesday, June 7, 2011 at 6:35 p.m. in the Aldermanic Chamber. Alderman-at-Large Brian S. McCarthy presided. Members of the Committee present: Alderman-at-Large Barbara Pressly Alderman Michael J. Tabacsko Alderman Jeffrey T. Cox Members not in Attendance: Alderman-at-Large Mark S. Cookson Also in Attendance: Alderman-at-Large Ben Clemons James M. McNamee, Esq. Corporation Counsel John Patenaude, Interim CEO of Pennichuck Corporation Donald L. Ware, President, Regulated Utilities, Pennichuck Corporation Alderman Tabacsko I would just note for the record that I just received an e-mail on my phone from Alderman Cookson addressed to both you and I, that he was not able to make this meeting and he was trying to make our next meeting of the Planning & Economic Development Committee. Chairman McCarthy Thank you. PUBLIC COMMENT – None UNFINISHED BUSINESS - None NEW BUSINESS – RESOLUTIONS R-11-120 Endorser: Mayor Donnalee Lozeau AUTHORIZING THE MAYOR TO GIVE PRIOR WRITTEN CONSENT TO PENNICHUCK EAST UTILITY, INC.’S PROPOSAL TO BORROW UP TO $400,000 FROM THE STATE REVOLVING LOAN FUND MOTION BY ALDERMAN COX TO RECOMMEND FINAL PASSAGE ON THE QUESTION Chairman McCarthy I will ask Mr. Patenaude, Mr. Ware, and Attorney McNamee to join us. James McNamee, Esq. I think probably the best thing to do is cut to the chase and have Don explain exactly what the proposal is. What you are being asked to do as a procedural matter is give your approval because under the Merger Pennichuck Water Special Committee -2- 06/07/11 Agreement that we have with Pennichuck prior approval is needed for certain things that are a little beyond the ordinary course and specifically the agreement talks about borrowing. This is a borrowing that is proposed by Pennichuck for capital purposes and Mr. Ware is here to explain and answer any questions you have as to what the purpose is. Donald L. Ware Let me give you a quick rundown. First of all this is a project where we are replacing an older community water system and the treatment associated with it in a community water system known as Liberty Tree, it serves 72 homes in the Raymond area. It was in our capital budget for this coming year. Originally we had intended to fund it with an inter-company loan between actually Pennichuck Water Works and Pennichuck East. We had filed last year to try to attract the state revolving loan fund money, and at the time when they did the rating, out of the 50 someodd applications, this project was rated 11, 7 projects ended up getting funded. This spring a couple of the larger projects that were going to be funded the community said we’re not going to do it, and so the money flowed down to the next projects down the line that were qualified. In terms of debt money it is at 2.846%, but at a very attractive interest rate with 35% principal forgiveness. In terms of financing this project, which we’re going to do and originally were going to do with an inter- company loan, this is very very good for the customers. Consequently the process for us, as has been mentioned, to take on additional outside debt requires the City’s approval. Also we filed with the Public Utilities Commission (PUC) because any new debt taken on by the company has to be approved by the PUC so we have made a filing there. We’re in the process of trying to gather the approvals with the hopes of closing on this loan in the latter part of July, early August and initiating this project. This loan money that is available, about $400,000, will cover about 2/3 of the project costs. Alderman Pressly Thank you Mr. Chairman. If this were not to be approved, what would the interest rate be? Donald L. Ware The inter-company loan, which is a short-term loan, would be at 7%. Alderman Pressly How long has Liberty Tree in Raymond been part of this? Is this one of the communities that the PUC has asked Pennichuck to “fix”? Donald L. Ware No. This is not part of Pennichuck Water Works this is part of Pennichuck East. This was part of the original consumers New Hampshire agglomeration of water system, which currently there are 44 water systems that provide service in 18 communities to a little over 6,800 customers. This is one of those systems. It was actually built by Policy Well in the early 1970s, bought by consumers in the early 1980s, which is when the first rebuild of this facility occurred and when treatment first went into that facility. Alderman Pressly How many of the communities in that conglomerate does Pennichuck East service? Pennichuck Water Special Committee -3- 06/07/11 Donald L. Ware There are 44 water systems in Pennichuck East Utilities with a total of a little over 6,800 customers that make up the regulated group of Pennichuck East Utility that has a common rate amongst all of the customers. Chairman McCarthy Was that your question or was your question what portion of consumers did Pennichuck take over? Alderman Pressly That is part of it, just a little bit more about the conglomerate. Do they sort of pay their own way? One of the concerns that has been raised over the years is that the PUC has requested that Pennichuck take over small groups that have had a hard time because Pennichuck has better services, are larger and can do a lot more. Is this part of that? Donald L. Ware This is, again, part of Pennichuck East where they have a common rate and so everybody at Pennichuck East, there is an admin flow to these small systems and so sometimes you are putting money in one system because of a change in the standard, another time because a well pump has failed, you are putting it over here but it is a common rate group so that the money spent here and the support of the debt and the retirement of the debt and the operating costs associated with this will be borne across all 6,800 customers in the Pennichuck East group. This has no impact on the rates that say are paid in the City of Nashua. That is Pennichuck Water Works. This group was put together, actually has a significantly higher rate requirement than Pennichuck Water Works because of the nature of these various divergent little communities that are out there that are just harder to provide service to. Alderman Pressly Really the question that the Chairman asked; percentage of the group. Donald L. Ware There are 72 out of roughly 6,800 customers. Chairman McCarthy Am I correct that this was one of the systems that was acquired when Consumers essentially stopped doing business and sold… Donald L. Ware We bought the Consumers facilities that were in New Hampshire at the time that Hudson had their eminent domain filing. Hudson acquired obviously the Hudson system, but did not want to have to own and operate the other systems that were outside of Hudson that were in New Hampshire. Part of the deal that was struck at the time was that we stepped forward and purchased all of the Consumers New Hampshire facilities outside of the Town of Hudson. We took them over, set up a separate utility from Pennichuck Water Works, Pennichuck East, so it would have its own set of rates and that the investment and the activity that goes in there would have its own set of rates. Pennichuck Water Special Committee -4- 06/07/11 But there is interconnectivity in that the Pennichuck East customers pay about $1.3 million in management fees to Pennichuck Water Works so that Pennichuck Water Works, there is a management fee allocation set up so that the cost of the overall management, the indirect overhead if you will of the operation or the admin and general costs are spread amongst the subsidiaries of Pennichuck Corporation and they flow out of Pennichuck Water Works to Pennichuck East, Pittsfield Aqueduct to the water service company in Southwood. Alderman Pressly Can you tell us a little bit about the status of the revolving loan fund? Do you know how much they have there and is this a competitive proposal; are they competing with other people for the loan fund money and that sort of thing? Donald L. Ware Yes. As I had indicated, you do a filing. In fact the filing for next year’s available funds, there is a preliminary filing that is due July 1st and then there is a hurtle, if you make it through the preliminary filing then you do a formal filing and then they make a decision typically in the late fall of each year to say okay here is the ranking, and they rank based on the benefit to the customers, and then based on the amount of money that they have they give that money. Then you go to public hearings in those communities and the communities either say we want the money or we don’t want the money. Several of these communities came in and said well it is great money, but we want money like what was given out with the stimulus funds, we want grant money. Chairman McCarthy Free money. Donald L. Ware Free money, right. Alderman Pressly Okay. Do you have any idea how competitive it is, who else is…what are their chances of getting… Chairman McCarthy This loan has already been approved. Alderman Pressly This has been… Donald L. Ware Yes. Chairman McCarthy This has trickled down from last year’s pot because some of the top 7 finishers who were funded did not go through so their 11th place… Pennichuck Water Special Committee -5- 06/07/11 Alderman Pressly So it more likely that they can get it or we can get it. Donald L. Ware It has been offered to us, and again the processes we have filed, because we have to get approval of the PUC on all loans, which takes typically on the order of 120-150 days, 4-5 months. As soon as we got the notice from DES at the beginning of May that said this money is available, if you want it let us know, and we said okay there are a couple of places we have to touch stones; obviously the PUC and in this case under the Definitive Merger Agreement, the City of Nashua, well can you get that all taken care of by the end of July. Our answer to them was we are sure going to try. The purpose of our being here tonight is to seek approval. If you folks approve and the PUC approves then we would be signing this loan document with the State under the conditions that I had mentioned, which is a 20 year note at 2.846% with 35% principle forgiveness, the latter part of July into early August and use that to fund the project that was going to be done this year at Liberty Tree. Alderman Pressly Thank you. Chairman McCarthy What does the principle forgiveness mean? Donald L. Ware It is an interesting concept; so I borrow $400,000, I continue to pay interest as if I borrowed $400,000, but in this case when they send me my bill for $20,000 for the principle part of it they say instead of paying $20,000 you only have to pay 65% of that. Basically instead of paying them $20,000 you are going to pay them $14,000. You are going to pay the interest on the total loan amount so the interest is at the 2.846%, but the principle you end up paying back less principle so at the end of the day when I have paid off this loan in 20 years I will not have paid $400,000 in principle off I will have paid 65% of that off. Chairman McCarthy Plus the… Donald L. Ware Plus the interest correct. The interest would be as if you borrowed the full $400,000, it is the principle part of it that they are forgiving. Chairman McCarthy It seems to me that at 2.8% that still comes out to somewhere at best in the neighborhood of the original principle in total payment. Donald L. Ware Again, these are, in terms of municipalities and water companies SRF money, the revolving loan money, is the best available source of financing that is out there. It is always at rates less than you can get say as a Triple A rated entity because there is some federal of the loans themselves. Typically again they do the Pennichuck Water Special Committee -6- 06/07/11 principle forgiveness based on the ratio of the expected water rates to the median family household income in the community that you are serving. Alderman Clemons Just briefly, I think we have used the revolving loan fund before for Haines Street right? I think we used it for Haines Street, some of that project. That is what comes to mind and maybe something else as well. Alderman Cox Wastewater facility? Alderman Clemons The wastewater maybe, but I know the city has used it before, and Mr. Ware is right it is the best option. Alderman Cox Last year when you applied, how much did you apply for? Was it $400,000 or was it the full… Donald L. Ware We applied for $400,000. Part of the process is you do these applications so far in advance that the design hasn’t matured at all yet. When we got in there in a detailed look we found out that the atmosphere of tanks, which we had hoped we were going to reuse, after 30 some odd years of service, there was significant pitting. Sometimes you see that in these older tanks and sometimes you don’t. We then had to replace those tanks. We’re still looking at, what we have painted, are we think the project on the outside currently with a 25% contingency, is going to run about $600,000. We may find a way; obviously we want to try to get it down into the $400,000 range. We carried $600,000 in our capital budget, but since we only applied for $400,000 that is all that they will allot through the loan. Alderman Cox So the additional amount, would you be using that inter-company loan? Donald L. Ware Yes. Alderman Cox Thank you. Chairman McCarthy You don’t normally fund 100% of capital projects from debt anyway… Donald L. Ware Right. There is a mix of debt and equity. The PUC likes to see us as well as typically our bond holders want to see us have a certain amount of equity in the company. Usually, depending upon the company minimum, of 35-40%. Normally a health utility is going to run about 50% equity, private utility 50% debt. A project like this, again it depends, but you are funding it with a mix of debt and equity. Some projects are all Pennichuck Water Special Committee -7- 06/07/11 debt, some projects are part equity. When you roll up the entire utility’s projects you get that mix or target mix of debt and equity. Alderman Tabacsko Thank you. Thank you Mr. Ware. When doing a project like this that is in the Pennichuck East unit for lack of better terminology, at the end, after this project is funded and now it is carried on the books and there is this loan and the rest of whatever the balance is, does this come back at the Pennichuck Corporation level to benefit the bottom line of the corporation’s books or does it stay at the operating company level, and I may have the wrong terminology here, but… Donald L. Ware Each one of the subsidiaries has a net income. That net income obviously rolls up into the parent company’s total net income. Net income in the utilities, at least as a private utility, is a function of when you go in for rates they allow your direct expenses dollar for dollar; power, chemical, labor, so on and so forth, they allow a return on investment based on the rate base that is approved. In this case, if this project gets approved, there is $600,000 worth of rate base. When they calculate your return on investment they are going to look at the overall rate base and how much debt and how much equity, multiply it by the various interest rates to come up with a blended return on investment that in turn determines the revenue requirement of the utility. Chairman McCarthy This debt itself will be carried on Pennichuck East’s books … Donald L. Ware It will be carried on Pennichuck East’s books paid solely through their revenue requirement so their revenue requirement, as I mentioned, would include expenses, which includes that inter-management, the admin and general allocation of management. There is really no cross-over. What happens is that on this loan the parent does guarantee the subsidiary loan, but the rate making is such that again with timely rate filings, there is not an issue meeting the payment requirements of these particular loans. Alderman Tabacsko Thank you. Alderman Pressly I don’t know how to ask this question. I know that the City has authorized special State and public money over the years, long before we hoped to buy the company. Do you have any idea how many times the City has…I assume we are going to do this tonight too, but do you have any idea how many times the City has helped out Pennichuck over the years? Donald L. Ware What do you mean by helped out? Chairman McCarthy We don’t approve those. Those are all private transactions between Pennichuck and DES. Pennichuck Water Special Committee -8- 06/07/11 Donald L. Ware The only reason that we are here asking for this now is the Definitive Merger Agreement says if we want to enter into a loan…the loan is between ourselves and the DES. Alderman Pressly Well then I stand corrected. I have always been led to believe that the City has had access to better rates along the years and has allowed to be the conduit for… Donald L. Ware No. Alderman Pressly So that is not true? Donald L. Ware We have never had any financing through the City in any way, shape, or form. Alderman Pressly Then I appreciate your clarifying that for me. Thank you. Chairman McCarthy Are there any other questions or comments? The motion is to recommend final passage of R-11-120. Is there further discussion? MOTION CARRIED NEW BUSINESS – ORDINANCES – None PUBLIC COMMENT - None REMARKS BY THE ALDERMEN - None ADJOURNMENT MOTION BY ALDERMAN COX TO ADJOURN MOTION CARRIED The Pennichuck Water Special Committee meeting was adjourned at 6:57 p.m. Alderman Jeffrey T. Cox Committee Clerk