Pennichuck Water Special Committee

REPORT OF THE PENNICHUCK WATER SPECIAL COMMITTEE JULY 24, 2014 A meeting of the Pennichuck Water Special Committee was held on Thursday, July 24, 2014, at 7:06 p.m. in the Aldermanic Chamber. Alderman-at-Large Daniel T. Moriarty, Chair, presided. Members of the Committee present: Alderman-at-Large David W. Deane Alderman-at-Large Lori Wilshire Alderman Sean M. McGuinness Members Not in Attendance: Alderwoman Mary Ann Melizzi-Golja Also in Attendance: Alderwoman Pamela T. Brown In attendance representing the Pennichuck Corp. were as follows: Mr. Don Ware, Chief Operating Office Mr. Thomas Leonard, Chairman of the Board of Directors Mr. Larry Goodhue, Chief Financial Officer, Treasurer, & Controller Mr. John Patenaude, Chief Executive Officer ________________________________________________________________________________________ PUBLIC COMMENT - None COMMUNICATIONS From: John L. Patenaude, Chief Executive Officer, Pennichuck Corporation Re: Pennichuck Corporation Quarterly Report to the Sole Shareholder for the Quarter Ended March 31, 2014 MOTION BY ALDERMAN MCGUINNESS TO ACCEPT AND PLACE ON FILE MOTION CARRIED ON THE QUESTION Chairman Moriarty I think it’s worth stating that the most important item on this is the Integrated Capital Finance Plan that comes up as the third one on the agenda. I noticed that the quarterly report is of course, dated March 13 th and it mentions that there will be a shareholder meeting which we already had. Would anybody like to comment? Mr. Leonard If anyone has questions about our annual meeting, we are certainly happy answer them but it was kind of uneventful. It was all positive. Chairman Moriarty Reading through this, again becoming slowly familiar with the M.A.R.A. the Municipal Acquisition Regulatory Asset, and you see occasions where if someone were to go on-line and read this they would see these shocking numbers of losses here and there but my understanding is that it’s all planned because with the M.A.R.A. you choose to depreciate the M.A.R.A. away over…the plan is to depreciate the M.A.R.A. away or amortize the M.A.R.A. over a period of 30 years and so your moving money from one side to the other and in Pennichuck Water Special Committee -2- 07/24/14 the end, I think that the number that matters the most is the unaudited cash flow statement on page 7. As long as the cash flow statement is positive, we are okay. Mr. Patenaude One of the numbers that is the most important number in my mind is earning before interest, taxes, depreciation, and amortization which funds our capital expenditures and interest costs and principal repayments and that’s a positive number and it grew a little over last year. If you remember, January, February, and March are not stellar months for us because usage is typically way down but the “EBIDA” is the important measure for us. Mr. Goodhue That’s kind of the cash basis proxy for the operating income so it’s the cash generated out of the business to fund the obligations. Mr. Leonard The other thing that is probably worth noting on all of these figures is that we are very much in line with the predictions, the pro-forma and all of the anticipated revenue streams, expenses, etc. We are hitting the mark and are at or better than expectation. Chairman Moriarty From a business perspective, the math is always self-consistent and that things ebb and flow you are always going to submit rate cases to the PUC and assuming the reason that the dollars ebb and flow are legitimate business reasons; then the company will always stay solvent because the PUC will adjust the rates so that the income always covers the expenses. Then, of course, as a shareholder, that’s the most important thing to us; as a rate payer, they just hope that whatever you do you are good at what you do so that you don’t have to ask for increases in rates. From: John L. Patenaude, Chief Executive Officer, Pennichuck Corporation Re: Rate Cases – Pennichuck Water Works, Inc., Pennichuck East Utility, Inc. and Pittsfield Aqueduct Company, Inc. MOTION BY ALDERMAN MCGUINNESS TO ACCEPT AND PLACE ON FILE MOTION CARRIED ON THE QUESTION Chairman Moriarty Regarding the comment we just had about the PUC adjusting the rate cases so that the math adds up, what I noticed here is that the numbers you asked for were all slightly higher than what was granted. In one case, Pennichuck Water Works asked for a .12% increase and you guys agreed to nothing. In another case you had asked for 9.3% and were granted 8.9%, and in the last case were requested 9.97% and got 9.91% so in all of them the numbers that were granted were very close to what was requested but they are all low. Can you comment on that? Mr. Patenaude That’s the normal process because when we filing the rate cases there are what we call pro-forma adjustments for a period cost that come forward and some of it are estimates, for instance, for property taxes Pennichuck Water Special Committee -3- 07/24/14 and everything else. The PUC goes through an extensive audit of the numbers and some of these costs are adjusted either up or down, depending on their audit here, there were miniscule adjustments. Chairman Moriarty Do you suspect there will ever be a time where you will accidentally ask for a lower number and they will give you a higher number? Mr. Patenaude No. From: John L. Patenaude, Chief Executive Officer, Pennichuck Corporation Re: Pennichuck Water Works, Inc. – Integrated Capital Finance Plan MOTION BY ALDERMAN MCGUINNESS TO ACCEPT AND PLACE ON FILE MOTION CARRIED ON THE QUESTION Chairman Moriarty I would suggest, just because they come in a pair, that we… Alderman Deane I got you on that. I’ll make a motion for the sake of discussion. MOTION BY ALDERMAN DEANE TO RECOMMEND FINAL PASSAGE OF R-14-053 Chairman Moriarty That wasn’t the one I was looking for. Alderman Deane I’m sorry. MOTION WITHDRAWN From: John L. Patenaude, Chief Executive Officer, Pennichuck Corporation Re: Pennichuck Water Works, Inc. – Rate Case – Test Year 2012 MOTION BY ALDERMAN MCGUINNESS TO ACCEPT AND PLACE ON FILE MOTION CARRIED Chairman Moriarty There is a fifth communication from Attorney Stephen Bennett regarding the Integrated Capital Finance Plan; it is the one that has all of the testimony in it. A lot of the material that is in communication three is repeated in communication four so it might make sense to go ahead and accept communication five while we are at it. Pennichuck Water Special Committee -4- 07/24/14 From: Stephen M. Bennett, Esq., Corporation Counsel Re: Resolution R-14-053 MOTION BY ALDERMAN DEANE TO ACCEPT AND PLACE ON FILE THE COMMUNICATION FROM STEPHEN M. BENNETT, ESQUIRE, CORPORATION COUNSEL, REGARDING R-14-053 MOTION CARRIED ON THE QUESTION Chairman Moriarty Okay, so you want to ask for $54 million in debt? Please educate us. Mr. Goodhue The $54 million represents a number of components. Number one, it represents $5.1 million in taxable debt, which is to reimburse the company for money used out of working capital or drawn on a line of credit for capital expenditures in the year 2013 and in January of 2014. The reason that it is taxable is that we cannot issue tax exempt debt for that because it is in a rearview mirror. Once you get approval for tax exempt debt there is a 60-day look back window and we received approval to issue tax exempt financing in March of this year from the BFA, the Business Finance Authority of New Hampshire so we can only reach back into January so it represents our ability to reimburse short-term monies that we’d use at the company to finance long-term capital investments and that’s the $5.1 million. $19.5 million of it is related to capital expenditures for the remaining 11 months of 2014, 2015, and 2016 and those would be tax exempt bonds. About $23.4 million or $23.375 million relates to the refinancing of certain current debt that is already on the books and records of the company. There’s a last slice of about $5.4 million that’s related to issuance costs and a possible debt service reserve that could be required relative to the financing. I’ll speak to that one again in a moment. Relative to the $23.375 million of refinancing, when the city purchased the company, the one thing that we knew that needed to be addressed was the long-term structure of debt for the company. When the models were put together in support of the city’s boding to purchase the company there were forecasts put out into the future and what we are talking about here, relative to the expenditures on an annual basis, is consistent with that model. In fact, that was the basis of where we even started this process so all the assumptions, all of the dollars and all of the investment which was originally contemplated when the city bought us in all of that modeling; that was the baseline. That’s where we started. That is the investment levels that we are talking about. It was contemplated that all of the future capital expenditures would be funded solely by debt. That’s the way the company is right now. In the past, we could fund Cap X through either equity or debt but we no longer have the ability to fund through equity, that’s not available to us any longer. Part of our existing debt was structured with ballooned maturities so you would put debt out there for 30 years and only pay interest and then in 30 years you would pay 100% of the principle. That was based on that preexisting structure in that in the future, you would either re-bond it if there was remaining life available and/or you would do an equity raise to then bring money in from the equity markets to pay off that balloon. Now that’s off the table, we have to look at how we are structuring the company going forward so this entire plan was put together for a couple of purposes. Number 1, to fund our existing capital needs as was in the original plan and to begin the process of reconstructing the overall debt portfolio of the company to conform to the existing ownership structure of the company. By refinancing $23.375 million with a debt, we will be taking some debt that currently has either a balloon payment in 2018, 2025, 2030, or 2035; and turning it into debt that amortizes fully over the life of those bonds. That does two things; number 1, it takes away interest rate risk in the future because when you go to refinance a balloon to the future you don’t know what the interest rates are going to be but all indications are that interest rates in the future are going to be much higher than they are now so we can eliminate that risk or mitigate that risk. Number 2, we can take away refinance risk. You might get to a point in time in the future; the 2018 bonds that are maturing, that balloon is about $7.3 million. You can’t issue a tax exempt bond below a $10 million tranche so all of a sudden, we wouldn’t be able to re-market those on themselves because we Pennichuck Water Special Committee -5- 07/24/14 may not have enough remaining life so we take that risk away. Number 3, how we earn money to prepay the principal portion of our debt is related to our depreciation. Our depreciation is earned ratably over the life of our assets. In restructuring this debt and repaying it ratably, (at an even rate) we get a better matching in our cash flow in versus our cash flow out. You have probably heard the term straight line depreciation so if you had a $1 million dollar asset and you had a 20 year life; you depreciate at $50,000 per year. We are talking about repaying debt in a stream that is very analogous to that. We are repaying at a rate similar to the monies coming in from depreciation to pay for that debt. These were our goals. This is the first step in a process. We anticipate doing the same with the remainder of our long-term debt where we can do it. There are some limitations of doing it right now but while we can still take advantage of lower interest rates. Right now they are talking about historically low interest rates so the time is right to do this to properly reposition the company such that all of us, when we are looking at this company going forward, we can feel comfortable that we have done the right thing for the company, the rate payers, and for the shareholder. Those are our driving forces. The last thing I wanted to say is relative to the $5.4 million that I talked about, we are still going to have that issuance cost of about $1.2 or $1.3 million and that will be locked down to a certain number, that’s an estimate right now. As far as the debt service reserve which is 10% of the total debt; there was the possibility that we were going to have to fund that. We would either borrow the additional money to fund it and that would increase the debt service cost and/or procure a surety bond to basically ensure that risk. As we have gone through the process and have done some preliminary work with some of the rating agencies to understand the structure, it appears that at this point in time, that is off the table; that we will not be required to put a debt service reserve in place which is a very good number. We are looking at reducing that number by about $5 million. That’s what the indications are now but we are still working through it. The market can still change between now and the time that we close on these bonds in November or December and we don’t have the final ratings but we have got some good indications that that is the position that we are going in. That’s a very favorable thing relative to the whole process at this point in time. Alderman Deane So you are not going to be required to maintain a debt service reserve? Mr. Goodhue Not for this indenture as it looks right now, Alderman Deane. Alderman Deane The $19.5 million that’s spread out over three years for capital; what’s the plan in 2017? Mr. Goodhue We have a capital budget. Alderman Deane So there is a set plan in place so you are looking at $6.5 - $7 million per year for capital improvements? Mr. Goodhue One of the things that we do as a company every year as a part of our annual budgeting process is we do a three year capital planning process so one, it supports the current year’s budget and then the two out years. That’s done for a couple of reasons. One reason is support of the WICA filings that we do. We must give that three year projection. It also gives us a window to look into the future as far as our capital needs, especially with regard to this. Actually, in the application that we filed with the Business Finance Authority of New Hampshire, we had to put forth the schedule that shows the general dispersion of those assets to make sure that they were qualifying assets for tax exempt treatment and to give a weighted average useful life to make Pennichuck Water Special Committee -6- 07/24/14 sure that that useful life exceeded the life of the bonds that we were going to go out for which is 30-year bonds. It’s a combination of an investment in manes and meters and upgrades to tanks and all of the various, basically all of the capital equipment for the company. Mr. Ware Just to supplement that. This stet in conjunction with state revolving loan fund debt, you may recall that we came to you several months ago to seek approval for state revolving fund loan debt to the NH DES. It’s those two pools of money that are projected to provide for Pennichuck Water Works overall plan for capital improvements through the next three years. Alderman Deane The state looks at the water company as an asset to them because they have always; in the past they used to come knocking on the door looking for help, did they not? Mr. Ware Yes. Alderman Deane So your capital…do you have an average on…even in your out years when you are figuring the three years, you are between $6 million and $7 million dollars. Has that been pretty steady? Mr. Ware In this instance we are talking about just Pennichuck Water Works? Alderman Deane Right. Mr. Ware It’s been a fairly steady rate, like Larry explained; you have got your biggest tranche in money is replacing the aging infrastructure underneath the street which by in large we have been partnering with the City of Nashua in its sewer replacement program. Currently in the Town of Amherst where they are doing a lot storm drain work and the storm drain work is impacted or unable to be completed without replacement of the water main. The lion’s share is probably about 50% of the capital expenditures projected in the next three years are in the area of water main replacement. Alderman Deane So when you work in a cooperative fashion with the city and other municipalities, is the company absorbing any of the paving cost as well? Mr. Ware Typically what we do is, obviously, there is a benefit to both parties to do the project simultaneously. Very often one project can’t go without the other and then what we will do is share in the paving costs associated with the projects. Pennichuck Water Special Committee -7- 07/24/14 Alderman Deane That’s interesting because I’d like to see those numbers. I mean we just had a large…I don’t know if you did any work down on Northeastern Blvd., we’ve always had a large flooding issue there. The problem is the hydraulic modeling on the sewer lines. I’m not an engineer and never claimed to be, it’s just what I have learned. When you create that much impermeable area, the water has to go somewhere and the small brook that passes through couldn’t handle it. I remember water being a foot deep or so going across Northeastern Blvd. A lot of work now, unfortunately, most of it is emergency work, I mean we have some planned for our sewer replacement because the separation is basically off of the table. We have gone in another direction with the storage facilities and things of that nature from our original consent decree because that was what we had planned on doing; that’s where we lost a lot in the street paving area because we did not pave a lot of the inner city roads because we figured we are going to be ripping them up anyway to separate but then we figured well, what’s the EPA going to say if we are dumping all of this filthy water off of Main Street into the river. That didn’t make any sense so we went in another direction. We have been doing a lot of areas, typically around City Hall. Mr. Ware Most of the projects that have been accomplished lately by the city, like you said, typically, we work in a very collaborative fashion where, as you mentioned, a lot of times the city is not exactly sure where they are going go. The water mains on Northeastern Blvd. went in the 1960’s at a time where the regulations required separation of at least 10 feet between the water lines and storm and/or sewer lines. If they are far enough apart, you can carry out a replacement and not impact the water lines. Anything that went in prior to World War II, suffice to say, the old rule was to dig one trench and put the sewer in first and then they put the water in up top so when you have a sewer line that collapses, the only way to get to the sewer line below is to replace the water line. Those lines also are the lines that are in need of eventually being replace so we would work collaboratively and at such time the replacement happens, we will relocate water main and work with the gas company and with the city to locate the facilities and in a fashion so they can be maintained, operated and replaced in the future without the type of conflict that is going on. We have quite a number of projects; we just recently opened bids for what we term the 2014 Nashua Sewer Projects where there were a number of streets identified by the Nashua Engineering Department that needed to be replaced. We evaluated it and in most cases, the water line needed to be replaced in order to allow the sewer work to go in and it made sense to replace the water lines because they were also old – 1930’s/1920’s. We worked collaboratively to come up with a plan, select a contractor, coordinate the work, get into a community area one time and one time only so you are not disrupting the community to do sewer one year and three years later to do water and you are ripping up new pavement that was just put down. It’s a challenge because our fiscal years are six months off. We are doing our capital budget upcoming now for next year and typically we put in a lump sum of money in anticipation of what the city may do between July of next year and December of next year. We will identify streets in the event, based on our own asset management plan, in the event that say the city did not do work because keeping a continuum of replacement is very important in order to ensure that we don’t have emergency repairs and failures going on. Typically, at least for the last 10-15 years there has never been an issue. The city has always had more than enough projects to come up to fully utilize the funds we allocate for the replacement of our mains as well. Alderman Deane So, from a finance standpoint, what has been set aside to complete the work that the city was doing? It’s not like your company didn’t have the money not to finish. The sewer system has significant issues, we all know that and lines have been cameraed and it gets to the point where sometimes they just can’t prioritize things anymore because there’s nothing left, they have to go do the work because if the top drops out of it, they can’t…The anticipated workload and the locations for waste water in the city, how long is that list? Pennichuck Water Special Committee -8- 07/24/14 Mr. Ware One of the challenges we have had with our WICA Program is that we are supposed to identify the streets three years into the future. We have to file that in December and we just asked for a reprieve to get to January because typically the engineering department does not know what streets they are going to be looking at, even on a preliminary basis, until a February/March timeframe of the year preceding the July start of the fiscal year. We’d love to have a series over the next three years of sewer projects delineated so we could then delineate the water projects when we do our WICA filing. Initially, the PUC said “wait a minute, these are the streets that you said you were going to do and you did these over here, what went on?” We explained the process, we explained the reaction time of what was going on and that we were effectively replacing the old unlined cast iron water mains and that it was just on different streets and explained the value of partnering and again, some of the challenges with mating up our timing with the city’s timing. Our engineering department works very closely with the Nashua Engineering Department and right now, the information we have from Nashua is just from the coming fiscal year; July 1, 2014 through June 30, 2015. We don’t have any firm projections from the city for July, 2015, on. I know they are looking at it though. Alderman Deane We have issues because of the age of our community and because the age of the sewer lines. It’s not that the engineering department and public works doesn’t want to follow a regimented schedule, there are times when they can’t. When the street goes or the sewer line goes and it’s creating more problems and the road becomes open, that’s where you are working. I was just wondering how you were juggling not only maintaining enough funding for it but you get a price per lineal footage to pull and lay water lines. I’ve seen just up by my house a few years ago there was a huge sink hole and it was very cold; I think it was January so they cut the street up and they found a valve there that nobody even knew was there. It didn’t even look like a piece of metal; it looked a rock when they took it out. I was just curious how you were able to juggle the capital improvements as it pertains to the city’s work. Chairman Moriarty This particular financing only goes out through 14’, 15’, & 16. Recently we have already taken on $1.5 million for Pennichuck and $2.9 from Pennichuck Water Works. So, on the one hand, the sort of lay man’s question is, is it ever going to stop, the request for financing? Mr. Goodhue The plans when the city purchased us were contemplation of investing in capital on an annual basis, on-going replacement of infrastructure. Don will speak to how many miles of pipe we address each year but the plan started out at $6 to $8 million per year and they grow with inflation over time; that is our on-going investment in our infrastructure. Mr. Patenaude The model that was provided to the city prior to the acquisition had that assumption, that future Cap X would be funded through debt every year. As a matter of fact, we had built in a 5.75% interest that we utilized and we compounded that. We are in line with that initial model. Mr. Goodhue As I expresses earlier, that was the baseline in support of this particular integrated capital finance plan. We started that with our baseline. Pennichuck Water Special Committee -9- 07/24/14 Chairman Moriarty So, somewhere in here in cash flow; if you take $6 million today and spread it out over thirty years, the payment is very small but if you take $6 million per year every single year over thirty years, the payments equal $6 million per year so is there essentially $6 million per year worth of debt repayment in the plans? Mr. Goodhue Over time, it would come to that, yes. Currently, I said that we are moving from a balloon maturity to a fully amortized maturity and that won’t be the debt obligation on a current basis, but over time, as that continues, you get 10 years or 12 years into the future, that is that type of a roll. That’s where depreciation on the assets acquired, that’s what is built into our rates as far as the cash flow that comes into the company because that’s below the EBIDA line as far servicing that date. Chairman Moriarty The $6 million per year, are you playing catch up or did Pennichuck always spend $6 million per year? Mr. Goodhue We always invested at those levels, sometimes higher. When we invested in our water treatment plant in 2005 – 2007, $40 million was spent in a 3-year period of time or in excess of that. That project alone was in that range. Alderman Deane Outside of the treatment plant, just basic roadwork capital investment and outside of what the city does for their work, what other work is being done in the roads? If the city is not replacing the water line, how much of that are we doing and are we doing it because the water lines failed? Mr. Ware The target is not to replace a main when it starts failing consistently. That would be a problem because it creates a fair amount of pavement damage and potential for flooding and other issues. When you are looking at your assets, first of all, it was mentioned in the Pennichuck Water Works system; there was 460 miles worth of pipeline. Those 460 miles of pipeline goes back to the first pipes being put in 1852 all the way up to pipes that are being put in today. Alderman Deane Do you have any wood water lines? Mr. Ware There are none in service, no. There were wood staved water lines that were in use in the late 1800’s. Wood was maybe the original water main but a lot of the water mains from the mid-1800’s on were cast iron pipe with very thick walls, and had a coating of tar on the outside to protect it from corrosion but there was nothing but cast iron on the inside. Over time, the inside of the pipe builds up a layer of rust which is kind of a sacrificial coating. The rust becomes a protection for the underlying base metal. We have about 40 miles left of water mains that are unlined. Those have a number of issues. It restricts fire flows and also you get high usage which is why you will get colored water. That’s why we flush our water mains every spring. We go out and try to create velocities in the water mains that exceed the usage during the summer and get that lose lining of iron off of the inside of those mains rather than having the customers experiencing it. Over time, the plan is that eventually, those mains will begin to fail with more regularity. We experience in that 460 miles of Pennichuck Water Special Committee -10- 07/24/14 pipeline typically about 20 water main breaks per year. Over time, the plan is to replace that water main and today’s newer water mains have a thinner wall, there was a cement lining on the inside and master coating on the outside. When they used to put the tar on the old mains they just slapped it on. Today it’s all machine coated and over time, that coating gradually erodes away. The industry has come to terms with the fact that whether you are using plastic pipe which is designed to last 100 years. The plan is to come up with a plan to replace approximately 100 - 150 years in age; although there is certain pipe, like the 24” out on Main Street that was put in 1853; that main will still be in service 300 years from now. Eventually we will go in and line that. If there is a sewer line being replaced we will cut back 10 feet on either side of where the sewer trench went through in order to bridge it with ductile iron which able to span that trench. One of the things that we are working on right now is being more diligent in evaluating all of the aspects of the right time to replace the water main. Replacements costs now are running as much $350.00 per lineal foot in the city. We have a plan for replacement and we are trying to refine that plan as part of our Asset Management Program and as we look into the future, we are seeing in the order of between 3 to 5 miles worth of pipeline being replaced per year realizing that the pipes didn’t always go in at 3 to 5 miles per year. In the 1960’s and 1970’s when there was a lot of development going on, you had 10 – 14 miles worth of pipeline put in at the same time. Alderman Deane So the main that broke on Allds Street, it is a little off topic, Mr. Chairman; I hope you don’t mind. What’s the status with that? Mr. Ware The main on Allds Street was put in 1960 and at that time there was a transition out of cast iron water mains by industry to what we call AC pipe which was a cement pipe. That pipe is somewhat brittle and so it will fail with more regularity than a piece of cast iron pipe. Right now the plan is do a replacement of that 16 inch main from Main Street out beyond Burke Street. That’s the first break on that section of the water main in 60+ years. When we excavated and looked at the main, it looked to be in good condition. The outside wasn’t soft. Eventually, it will fail from the exterior in because on the interior, it’s cement. There’s no corrosion going on. The plan is to replace that sometime in the vicinity of the bridge there because the last thing we need is to have a break on or about the bridge given the age and condition of the bridge. Alderman Deane But you have to have someplace for the water to go, right? Mr. Ware Yes but only it ran through all of the stone and granite and it was a quite a wash out. We worked with the city and the city brought in an engineer and evaluated the bridge. By in large, the bridge sustained without any real significant damage. Again, that’s on our slate for replacement. Alderman Deane This is with regard to the Broad Street Parkway. We approved a contract to a firm to move the pump for the fire protection. Did the Pennichuck Water Company provide any hydraulics for them? Mr. Ware Alderman Deane, I am not sure whether we provided any of the engineering associated with the hydraulics. I am sure that what we did do was provide them with what was available to the area so they could properly size the fire pump once it was replaced. Of course, as part of the Broad Street Project, there has been replacement of the water main on both sides of that project. The sizing of the main, the final selection of the main and the hydraulics in the area were coordinated in the design of the pump. We would not have designed Pennichuck Water Special Committee -11- 07/24/14 the pump but we would have provided the modeling and information on the flows that would reach the pump when it was running and the pressures that would be there when it was running. Alderman Deane So you provided them with information pertaining to the size of the water line? Did they tell you what size the water line had to be? Mr. Ware They told us that we needed so many gallons per minute delivered to the pump and at that then we gave them some options in terms of size because for instance, you could deliver that with say a 12”; 16”; or a 24” main and in each case, there was less drop in pressure at the flow rate the larger the water main is. But, there’s also substantially more cost the larger the water main you have. It was a balance point of finding the right cost for the replacement water main and it would then result in the overall lease cost for the pump itself. Alderman Deane It makes you wonder whether that pump that was there that was pulling out of the canal ever provided sufficient fire protection to begin with. Then you have to figure the modeling of all of the lines on the back side of the pump that cover all of the buildings. There is so much engineering that has to be looked at because you’ve got the criteria of what they are asking you for, the sizing of the pump and then the tens of thousands of miles of whatever they run for pipe. All of those buildings, Clocktower is one of them. It provides fire protection for all of those buildings which are all on that one pump. Prior to the pump being replaced, if there was a fire, somebody had to go over and turn it on manually. I have some interest in trying to find out what went on and how it was figured because we are moving it and we are paying for so I think that would probably make us liable for it. Alderman McGuinness May I have a little more of a description about the financing? I understand the financing sounds like a well thought out strategic necessity. You are basically restructuring debt. In this restructuring, are we saving any money in debt service and also as a footnote, perhaps you might speak to the issuance costs. It costs money to go out and issue bonds. I would hope that you would be looking for the best available vehicle to issue these bonds. I’m curious if there are any pre-payment penalties. Are we better off financially with our proposed restructure? Mr. Goodhue With regard to the re-financing, I am not going to say that we are going to save any money in the debt service; it will be pretty neutral relative to existing costs. We don’t know exactly what the rates are going to be by the time we close but based on current status it’s pretty neutral. The biggest part of that is number one, mitigating the interest rate risk in the future and that re-finance risk in the future. When you look at that based on the current market and the current interest rates, it seems to be the prudent thing to do because if we wait until 2018, chances are that in the next 12 – 18 months interest rates are looking to go up about 1% and in a 4 to 5 year time horizon they are talking 4% - 5% of the base interest rates; as per the Congressional Budget Office. If we go to refinance 4 years from now and we have a balloon due, instead of refinancing now at costs that are about analogous to what our current cost are, we could be refinancing at a cost that’s almost 2 times what our current cost is so part of this is making some calculated swaps as to what is going to be the overall long-term benefit to the process. Relative to any pre-payment fees, no; these are bonds. They are going to be structured where they have a life and they are going to mature. They are AMT bonds and will be subject to federal guidelines, IRS guidelines relative to AMT bonds. Could they retired early, I suppose so but that it is not the mantra that we are going under. We have a company here that we are going to invest in on an annual Pennichuck Water Special Committee -12- 07/24/14 basis and infrastructure and our plan would be to let that debt sit out there full term because that’s how we are going to collect the money. With regard to the issuance cost, the issuance costs we have are fairly standard relative to issuance of tax exempt bonds. There are certainly fees that we are required to pay to the Business Finance Authority of New Hampshire to use them as a conduit to the market place. There are certain legal costs that you must bear. There are certain rating costs. We don’t know yet whether we are going to issue these bonds with bond insurance attached or not. We have a model set-up to really analyze that and what it really comes down to is the spread between the market rating that we would have going out if we bought insurance attached versus going out with our own credit rating. That’s a real simple binary decision. The taxable portion is again, a market driven decision. We are looking at either issuing taxable bonds or doing a credit facility and again, that is market driven. There are two considerations there; you are looking at the differential in the cost of those, the present value of those two alternatives, and then the term that you would be repaying those. We are looking at those things in real time, live. I had a call with the bankers at TD yesterday to ask them to sharpen their pencils one more time. In fact, I got a new term sheet today that was a revision on one I received 3 days ago. We are going to keep pushing the envelope. We have to do the best we can for the company and the rate payers and the shareholder. We have to be able to finance the necessary capital improvements so we can deliver good service and water to our customers and we want to do that in the most economical way. There are some calculated risks in some of the decisions. Mr. Leonard I just have one comment. The three gentlemen up here have worked very hard to keep the informed of all of the details. The board has been involved for almost a year and actively these last 6 months. We have also been participating in it both at the committee level and at the full board level. All of the board members are very up-to-date on this and it has been a thoughtful process. I think from the boards standpoint what we tend to look at is this is a company that is in transition. It’s going from being a public company to being what everybody is referring to as being this hybrid and the financing for the company is one of the main differences between this company and all the other companies that you deal with. This particular effort is addressing those financing differences. The board is looking at saving costs but also reducing risk for the longer term. We, as a board, and I think it’s fair to say the company, has taken on a longer view of things. When you are in the public markets you don’t have the luxury of the longer view, you have to be able to deliver in the shorter term. We are changing that now and we are making sure that our financing matches what we are focusing on and that is the cash flow. That’s the point of view of the Board of Director’s. How do we minimize the risk over the longer view and with regard to whether or not it’s appropriate to refinance, it’s our view that the risk for those big balloon payments is not one we want to take on so we have said so long as we don’t lose money in the exchange, we are going to reduce the risk. Mr. Goodhue This strategy that we are undergoing as far as recapitalizing the company as far as the debt structure, as we have gone out to the rating agencies to talk with them about indications of where the company is at; one of the things that came back was our movement to this structure was actually looked upon very favorably with regard to our credit rating. Chairman Moriarty Thank you for sharing that information, it’s good to know. Alderwoman Brown This is a little bit off topic but there was some discussion about some of the challenges of planning because of the differences between our fiscal year end. Are there any plans in the future to change your fiscal year? Is that even possible? Pennichuck Water Special Committee -13- 07/24/14 Mr. Goodhue I would say that would not be a real likely scenario. As a corporation and relative to our existing stakeholders, having a calendar year as our fiscal year is really looked upon as being something that I would envision us sticking with. It does create some unique challenges but it does have other compelling reasons that make sense from the other side. Chairman Moriarty On page two it says “this petition filed with the New Hampshire PUC we explain that this proposed financing is consistent with the public good because it will allow Pennichuck to finance capital projects, refinance existing bonds, and generally improve the capitalization” and then at the very end it says “without having material adverse impact based on reasonable projections.” I think I understand, but what could go wrong? It says based on “reasonable projections.” Mr. Goodhue We could have four years in a row that Noah rode by because we had so much rain. If we had four years in a row where we had really wet summers, that would affect our revenues but we would be going in for rate cases. We’ve got projections that are based on reasonable assumptions. Again, the baseline was established on the model that was used by the city. Its projections are based on existing costs with inflationary impacts included in those revenues tied to those debt services. They took into consideration all of our fixed assets as they are now. The depreciation forecast, the amortization forecast on those and anticipated capital expenditures. It’s based on a good and solid set of assumptions but assumptions are just that. The one thing that is important to note as well is that built in the model that was originally used by the city was a certain inflationary factor for not only cost, but revenues. The model that we are talking about now is not far off from that at all and if you think about it, the first two or three years of the company’s existence post transaction, we have had 0% increase in revenues at PWW. The slope started from day one there and we actually had a flat plateau for 2012, 2013, and now we’ve got an increase approved at a rate order at 0% for 2014 and probably into 2015. There is nothing specific that I can identify. My first comment was that we cannot control the weather and that can affect our revenues. There is weather patterns that change and to the extent that those change, the consumption patterns change and that does affect our revenues and we would have to go in and seek rate relief for those should those occur. Chairman Moriarty On communication number 5, it goes to the interest rates. It says “the first $5 are 7 ¼% because it’s taxable, the second $19 million is 5.8%; and the $23 million is 5.5%. Those don’t sound low to me. I’m not a banker so I don’t see these numbers all of the time but I know you can get a car loan for 1% and if you look at the federal bonds, the interest rate is zero and it maxes out at 4% for a 30 year note. These seem high, please explain? Mr. Goodhue Number 1, those rates are based on market rates for tax exempt bonds. Those are also indicative rates relative to when we initially did this and it will bear fruit based on the market when we go to close. I can tell you that the taxable bond rates that were quoted in here at 7 ¼%; through this process we have actually seen market improvements in those rates at this point in time to the tune of about 250 basis points based on where we are at right now and the indications of where the company is being viewed. So you are talking about something in the high 4’s or maybe 5%. In the 4.75%; 5%; 5.3%; 5.5% rate, those are indicative of market rates if you looked at bonds in the market place at the rating level that our company is. We have been rated by Moody’s as the most recent update last December as a BAA2 credit on our own credit. We were originally a BAA3 and we were upgraded to a BAA2 in December. The indications are relative to the process we have gone through that we will be maintaining that rating and/or getting improvement on that when we go out to Pennichuck Water Special Committee -14- 07/24/14 issue these bonds. I mentioned earlier that we might be looking at bonding insurance if the economics worked and if that was the case, the particular bond insurer that we would be using has AA- rating which is a standard rating. Even with that, rates in that range are actually indicative of tax exempt bond rates that exist in the market place, not just for us, but for other companies that would be rated at those levels. They are not really analogous to T-bill rates and/or auto loan rates, unfortunately. For auto, they are lending money for a 3, 4, or 5 year period and here we are talking about somebody lending you money for 30 years so there are some differences there relative to the use of the money, what they are collateralizing and what their expected return is based on that structure. Chairman Moriarty Okay, thank you. So unlike a mortgage and these would be crazy high rates for a mortgage, the collateral is the house and this in case, what is your collateral? Mr. Goodhue That’s the difference, these are unsecured. When you get a mortgage they put a lien against your house and if you don’t repay, the bank owns the house. These are unsecured credits. Chairman Moriarty So the key term in unsecured. Really, the proper comparison would be a credit card which if you get 7 ¼% I think you are happy. Mr. Leonard You could also go see what other companies are borrowing in similar bonds and I think you’ll find these are low. These are very good rates. Chairman Moriarty Yes, I was educating myself. I have one more question. I didn’t get to finish the testimony but the neat thing about that is that it’s a Q&A session so in a sense you are answering their questions so that would be informative. Save New Hampshire before the New Hampshire Public Utilities Commission Petition, page two, Pennichuck Water Works and New Hampshire Public Utility Corporation providing retail water service to approximately 26,000 customers.” I was like that’s it? Mr. Goodhue You have to think about customers and it’s not analogous to population. If the average number of people in a household is three or four people, multiply that number by three or four. When you try to relate customers to population you have to look at the fact that we have one customer which is that household and it may have many members in that house hold. Some of those customers may be a business or an apartment complex. Chairman Moriarty So you consider a condo complex as one customer? Mr. Goodhue It’s based on meters. Pennichuck Water Special Committee -15- 07/24/14 Chairman Moriarty Of course, we have Amherst and Hollis that are all on a well for the most part. Mr. Ware We have 100 connections in Hollis. A fire protection service is a customer so if you have a building that is a commercial building, they may have a retail meter and a fire sprinkler system and that would be considered to be two customers. The definition of the word customer is defined by the Public Utilities Commission based on the connection and based on tariff charges. Chairman Moriarty I used to live in Hollis and there was a Strategic Planning Committee that I was on and one of the things that the Town of Hollis is very mindful of is their tenuously well and septic and if they make a couple of changes with the density, they are obligated to come in and provide sewer and they are just trying to do everything they possibly can to prevent becoming customers. Alderman Deane I used to live at 1128 West Hollis Street. It was so well hidden that I would call for a burning permit and fire department couldn’t find my house. Former Alderman Dyer, God rest his soul; had a sign put up. When they built the Overlook Golf Course and we had the Gilson Road waste site and everybody down there was on well water. Some of my neighbors wanted to get water and the cost that was being charged to get on that line, and then all of sudden, the EPA stepped in and told us that we didn’t have a choice. There was no cost associated with it, they brought the water line in and put the meter horn in and then I found out that the old copper pipe in my house couldn’t withstand 85 lbs. of water pressure. Mr. Ware Basically in Hollis we serve the Overlook Golf Course area and then there is a condo project down there as well and that constitutes that range of service into Hollis. It’s a very small area. Mr. Leonard It is east of the river. UNFINISHED BUSINESS – None NEW BUSINESS – RESOLUTIONS R-14-053 Endorsers: Mayor Donnalee Lozeau Alderman-at-Large Lori Wilshire APPROVING THE PROPOSAL OF PENNICHUCK CORPORATION TO BORROW AND ISSUE UP TO FIFTY-FOUR MILLION FIVE HUNDRED THOUSAND DOLLARS ($54,500,000) IN AN AGGREGATE PRINCIPAL AMOUNT OF TAX-EXEMPT AND TAXABLE BONDS AND/OR FINANCING MOTION BY ALDERMAN WILSHIRE TO RECOMMEND FINAL PASSAGE MOTION CARRIED Pennichuck Water Special Committee -16- 07/24/14 NEW BUSINESS – ORDINANCES – None PUBLIC COMMENT - None REMARKS BY THE ALDERMEN Chairman Moriarty I thought it was very educational as usual. I should do a better job of marketing this meeting for the popular mechanics types of people. POSSIBLE NON-PUBLIC SESSION - None ADJOURNMENT MOTION BY ALDERMAN WILSHIRE TO ADJOURN MOTION CARRIED The Pennichuck Water Special Committee meeting was adjourned at 8:22 p.m. Alderman Sean M. McGuiness Committee Clerk