20190215Palfreyman Direct.pdf

Preston N. Carter (ISB No. 8462)
Givens Pursley LLP
601 W. Bannock St.
Boise,ID 83702
Telephone: [phone]
Facsimile: (208) 388-1 300
prestoncarter@ givenspursley. com
1 4547 942_t.DOC I l 3988. 1 ]
Attorneys for Gem State Vlater Company, LLC
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BBFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPROVAL
OF ACQUISITION OF THE ASSETS OF
SPIRIT LAKE EAST WATER
COMPANY AND LYNNWOOD
WATER; FOR AMENDMENT AND
TRANSFER OF SPIRIT LAKE EAST
WATER COMPANY' S CERTIFICATE
OF PLIBLIC CONVENIENCE AND
NECESSITY (No. 293); AND
REQUEST FOR MODIFIED
PROCEDURE
caseNo. $PL- u;- /Q_o /
DIRJOCT TESTIMOIYY OF JUSTIN PALFREYMAN
ON BEHALF OF'GEM STATE WATER COMPANY, LLC
February 15,2019
ORIGINAL
1 BACKGROUND
2 Q. Please state your name and title.
3 A. Justin Palfreyrnan, President of Gem State Water Company, LLC ("Gem State Water"). I also
4 serve as the President of NW Natural Water of Idaho, LLC ("NW Natural Water of Idaho") and NW
5 Natural Water Company, LLC ("NW Natural Water").
6 Q. Please summarize your professional experience and educational background.
7 A. I have worked for 16 years in strategy, finance and corporate development functions. I most
8 recently worked as a Director inLazard' s Power, Energy and Infrastructure Group in New York,
9 where I provided strategic and financial advice to corporations, institutional investors, private equity
10 funds and government clients. My advisory assignments related to general strategic advice; mergers,
11 acquisitions and divestitures; raising capital; restructurings; corporate preparedness/takeover defense;
72 and capital structure optimization. Prior to Lazard,I worked in the Infrastructure Investment Banking
13 Group at Goldman Sachs in New York. I also previously held various positions in finance, strategy and
74 business development at both Apex Leaming and Accenture in Seattle, Washington.
15 I hold an MBA from the University of Chicago Booth School of Business, a Master's of Public
76 Policy from The University of Chicago Irving B. Harris School of Public Policy and a Bachelor's of
71 Business Administration from Pacific Lutheran University.
18 a. What is the purpose of your testimony?
19 A. My testimony is offered to provide the Idaho Public Utilities Commission (the "Commission")
20 and Commission Staff with information regarding Gem State Water's proposed acquisition of the
27 assets of Spirit Lake East Water Company ("Spirit Lake") and Lynnwood Water.
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PALFREYMAN, DI
Gpu Srers WarER
1 Q. Please describe NW Natural Water, and the relationship among NW Natural Water, NW
2 Natural Water of ldaho, Gem State Water, and other related companies.
3 A. NW Natural Water is a wholly owned subsidiary of NW Natural Holding Company ("NW
4 Natural Holdings"). NW Natural Holdings, which is headquartered in Portland, Oregon, is a publicly
s owned company with a market cap of approximately $1.8 billion. It has revolving credit facilities
6 aggregating to approximately $400 million. NW Natural Holdings' Form 10-K for 2018 has not yet
I been filed with the Securities and Exchange Commission, but we can supplement this filing when it is
a published later in the Spring.
9 NW Natural Water was created to own and operate water utilities, through subsidiaries, in
10 Oregon, Washington, and Idaho. NW Natural Water also has significant financial assets. It currently
11 owns and operates three water utilities, including Falls Water in eastern Idaho.
L2 Gem State Water is a wholly owned subsidiary of NW Natural Water of Idaho, which is in turn
13 wholly owned by NW Natural Water. Gem State Water was created to operate water utilities in Idaho,
74 including Spirit Lake and Lynnwood Water. Gem State Water and NW Natural Water of Idaho will
15 have access to the financial resources and the utility expertise of NW Natural Water, NW Natural
L6 Holdings and their affiliates.
l1 An organizational chart illustrating NW Natural Holdings' corporate structure is attached as
18 Exhibit 1. The chart has been designated "Confidential" per Commission rules.
19 a. Please describe NW Natural Water's interest in, and recent acquisitions, in the water
20 sector.
27 A. In recent years, leadership of the NW Natural family of businesses undertook a comprehensive
22 strategic review process to identify and evaluate potential growth opportunities that, among other
23 criteria, would offer a risk profile consistent with our core utility business and a long-term opportunity
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PeLFRrYueN, Dt
GEU STaTSWATER
1 to grow beyond our existing business. The outcome of the strategic review process was a strategy and
z planto pursue opportunities in the water utility and infrastructure sector, in addition to the ongoing
3 focus on our 160 year old gas utility, storage and infrastructure business. We believe that a water
4 strategy is a compelling fit for NW Natural because it would build on our core competencies of
5 constructing, operating and maintaining infrastructure, providing best-in-class customer service,
6 ensuring safety and reliability, and effectively managing a regulated utility.
7 NW Natural Water has been actively pursuing this strategy. NW Natural Water recently
8 acquired, and is currently operating, three water companies through direct or indirect subsidiaries
9 These companies include Falls Water in eastern Idaho; Cascadia Water, LLC, in Washington; and
1O Salmon Valley Water Company in Oregon. By owning and operating these water utilities, NW Natural
11 Water has gained valuable experience in the water sector. NW Natural Water will bring this
12 experience to Gem State Water.
13 THE TRANSACTION
74 a. Please describe Spirit Lake.
15 A. Spirit Lake is a privately owned, rate-regulated water utility located in Kootenai and Bonner
76 Counties in northem Idaho. I understand that Spirit Lake serves approximately 315 customers. Spirit
ti Lake holds Certificate of Public Convenience and Necessity ("CPCN") No. 293, oiginally issued by
18 the Commission in 1983. Leslie Abrams-Rayner (also known as Leslie Rayner) is the sole shareholder
t9 of Spirit Lake.
20 a. Please describe Lynnwood Water.
2t A. Ms. Rayner owns the assets of Lynnwood Water. Ms. Rayner summarizes the history behind
22 Lynnwood Water in the Affidavit attached as Exhibit 2. To summarize, Ms. Ralmer acquired
23 Lynnwood Water's assets after the former owners approached her in 20l4.In 2015, Ms. Rayner
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PeLnnEYM.LN, Dt
Gru Srerr WATER
1 purchased the assets of the system now known as Lynnwood Water. The rates and charges charged by
the prior owner were carried forward, without change, and the revenue from Lynnwood Water
customers was accounted for separate from Spirit Lake customers. Lynnwood Water currently serves
approximately I 8 customers.
a. Why is Gem State Water interested in acquiring the assets of Spirit Lake and Lynnwood
Water?
A. Acquiring these assets fits squarely into NW Natural Water's continued growth in the water
sector. Gem State Water, NW Natural Water of Idaho and NW Natural Water believe that Spirit Lake
and Llmnwood Water are well-run and well-maintained. However, like many water utilities, the water
systems, and Spirit Lake in particular, are in need of capital investment to support system growth and
maintain system integrity. Gem State Water, NW Natural Water of Idaho and NW Natural Water have
the financial strength to support these needs. These two systems also give Gem State Water, NW
Natural Water of Idaho and NW Natural Water a platform for potential additional acquisitions in
Idaho. Gem State Water, NW Natural Water of Idaho and NW Natural Water also believe that the
acquisitions will provide a seamless transition from Ms. Rayner, the current owner, and provide
customers with a clear path forward that does not depend solely on Ms. Rayner.
a. Please describe the proposed transaction to acquire Spirit Lake and Lynnwood Water.
A. On December 18, 2018, Gem State Water and the selling parties entered into an asset purchase
agreement ("Agreement"). Under the Agreement, attached as Exhibit 3, if approved by the
Commission, Gem State Water will acquire the assets of Spirit Lake and Lynnwood Water, as well as
the assets of Water Works Management,LLC ("Water Works"), an unregulated company.l NW
t The selling parties include Spirit Lake, Leslie Adams-Raynor as the owner of the Lynnwood Water
assets, and Water Works. Water Works holds certain water system management contracts and is
not a regulated utility. The Agreement has been designated "Confidential" per Commission rules.
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PILrREYMAN, DT
Gsu Srere Werpn
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t Natural Water of Idaho intends to offer employment to Spirit Lake's existing employees. It will also
2 offer employment to Leslie Rayner and Cole Rayner. Acceptance of employment by Leslie Rayner and
3 Cole Rayner is a condition of closing. I expect that Leslie Rayner will serve as the manager of Gem
4 State Water after closing.
5 Leslie Rayner is a licensed water system operator with significant experience with Spirit Lake
6 and Lynnwood Water's systems. By retaining Ms. Rayner, NW Natural Water of Idaho and Gem State
7 Water will ensure the technical and practical ability to operate the system going forward. We also
8 expect that Ms. Ralmer's experience and expertise will help prevent any disruption to existing
9 customers.
10 a. Is Gem State Water asking for any other action by the Commission?
11 A. Yes. Spirit Lake currently holds CPCN No. 293. Gem State Water is asking that the CPCN be
72 amended to incorporate Lynnwood Water customers within its service area, and that the amended
13 CPCN be transferred to Gem State Water. This will allow Gem State Water to provide service to
74 current Spirit Lake and Lynnwood Water customers.
15 If the transaction is approved, Gem State Water will file tariffs to reflect the ownership change.
1-6 There are currently no published tariffs for Lynnwood Water customers. If the transaction is approved,
ti Gem State Water will file a schedule to the revised tariffs that will apply to current customers of
18 Lynnwood Water. The schedule will reflect the current rates, rate structure, and any other charges for
19 Lynnwood Water customers as described in Ms. Rayner's affidavit.
20 a. Is Gem State Water seeking to change rates for Spirit Lake or Lynnwood Water
2l customers through this transaction?
22 A. No. Gem State is not seeking to change rates, rate structure, or other charges for Spirit Lake or
23 Lynnwood Water customers through this transaction. The current rate structure, rates, and other
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PeLrnrYueN, DI
GEna Srers Weren
1 charges will remain the same for each customer group. We understand that Idaho law authorizes the
2 Commission to provide for acquisition adjustments in certain circumstances for entities acquiring
3 water utilities in the State, but Gem State Water does not seek an acquisition adjustment with this
a particular transaction, and Gem State Water will not seek any increase to rates as part of this
5 transaction. Any future rate increases would be related to prudent capital investments or other
6 increased expenses, and would need to be justified at that time.
I Q. Does this conclude your testimony?
8 A. Yes.
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GEU Srerg WATER
EXHIBIT 1
ORGANIZATIONAL CHART
- This Exhibit contains trade secrets or confidential
material and is filed separately. -
(1 PAGE)
EXHIBIT 2
DECLARATION OF LESLIE RAYNER
(7 PAGES)
Preston N. Carter (lSB No. 8462)
Givens Pursley LLP
601 W. Bannock St.
Iloise. lD *7A2
Telephone: [phone]
Facsimile: (208) 388-l 300
?t,;ttt)txt *ri' g:.g.,b9rxtrq{tl*' .t ary
Attorneys.for ()em State Water Company, LLC
IN"THH MAI'TER OF THE APPROVAL
or ACQUrSrrroN oF THE ASSETS OF
SPIRIT LAKE EAST WATER
COMPANY AND LYNNWOOD
WA,|ER; FOR AMENDMENT AND
TRANSFER OF SPTRIT LAKE EAST
WATER COMPANY'S CERTIFICATE
OT PUBLIC CONVENIENCE A}.ID
NECESSITY (NO. 293); AND
RnQUEST FOR MODIFIED
PROCEDURE
BETORE THE IDAHO PUBLIC UTILITIES COMMISSION
AFT'IDAVIT OT LESLIE RAYNER IN
SUPPORT OT CEM STATE WATER
COMPANY, LLC'S APPLICATION
FOR APPROVAL OI; ACQUISITION
OF l]{E ASSETS OF SPIRIT LAKE
EAST WATER COMPANY AND
LYNNWOOD WATER; FOR
AMENDMENT AND TRANSIiER OF
SPIRIT LAKE EAST WATER
COMPANY'S CERTIFICATE OI;
PUBLIC CONVENITNCT ANI)
NECESSITY (NO. 293); AND
REQUEST FOR MODIFIED
PROCEDURTi
State of Idaho
County of Kootenai
LESLIE RAYNER" being first duly swom upon oath, deposes and states:
L I am a signatory to the December 18, 2018 asset purchase and sale agreement
among Cem State Water Company, LLC ("Gem State Water"), Spirit Lake East Water Company
("Spirit Laken'), Llnnwood Watero and Water Works Managemenr, LLC.
2. I am the sole shareholder of Spirit Lake and have been for over l0 ysars.
3. In early 2014, Bob and Jay Gddley approached me about acquiring the assets of
the water company that provided service to the Lynnwood Estates subdivision. Bob and Jay
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r..i,sr.rr RAyNr,R Ar.r.rDAV Exhibit No' 2r1' J. Palfreyman, Gem State Water Company
Page I
PACI I or,3
Gridley are the prior owners of the Lynnwood Estates Subdivision, and I believe they owned and
operated the water system as Lynnwood Estates Water Association Inc.
4. After a period of discussions and negotiations, in April 2015 I personally
purchased the assets of the water system now referred to as Lynnwood Water. I maintain
personal ownership of those assets today.
5. Since then, I have operated Lynnwood Water. Lynnwood Waler currently has
approximately 1 8 active customers.
6. A map illustrating the service areas of Spirit Lake (the area to the west) and
Lynnwood Water (the area to the east) is attached as Attachment l.
7. After I acquired the assets of Lynnwood Water, I carried forward the rates, rate
structure, and other charges for Lynnwood Water customers from the prior ownership.
8. The rates, rate structure, and other charges for Lynnwood Water customers are set
lbrth below.
. $35 monthly minimum, for up to 20,000 gallons;
. $1.00 per each additional 1,000 gallons in excess of 20,000 gallons.
. $2.00 per each additional 1,000 gallons in excess of 100,000 gallons.
o $3.00 per each additional 1,000 gallons in excess of 200,000 gallons.
o Other charges as indicated in Attachment 2, Lynnwood Water Item Price List.
Billing is sent out monthly. These rates and charges have not changed during my
ounership of Lynnwood Water.
9. I have discussed wi& Idaho Public Utilities Commission (the "Commission")
Staffthe possibility of requesting a Certificate of Public Convenience and Necessity (*CPCN")
Exhibit No.2
J. Palfreyman, Gem State Water Company
Page2
l-tist,[: RAYNtaR AI,t'lDAvtr PACI 2 ()r 3
and filing tariffs for Lynnwood Water customers. However, I have no1 requested a CPCN or filed
tariffs.
10. Although payments from Lynnwood Water customers have been sent to the same
office as for Spirit Lake customers, Lynnwood Water's administration, financial transactions.
and funds have been segregated from those of Spirit lake from the time I acquired Lynnwood
and remain segregated today.
I l. I fully support Gem State Water's acquisition of Spirit Lake and Lynnwood
Water. I intend to be employed by NW Natural Water of Idaho, LLC, Gem State Water's parent
company, if the acquisition is approved by the Commission. In that capacity, I intend to use the
experience and knowledge that I have gained while working with Spirit Lake and Lynnwood
Water, and their respective customers, to prevent any disruption in service.
12. I am a licensed water system operalor and intend to fill that role with NW Natural
Water of Idaho, LLC and/or Gem State Water, as applicable, going forward as well.
13. I am happy to assist the Commission, Commission Staff, and Gem State Water in
responding to any questions about Spirit Lake, Lynnwood Water, or other relevant subjects.
2019
By
Leslie Rayner
Subscribed and sworn to before me this {^auy rf EAan".f ,2019
Notary Public
Residing at:
My Commission Expires:
Exhibit No. 2
J. Palfreyman, Gem State Water Company
Page 3
DArED tni, l4auv,r Ebroy,
LLSLII. RAYNER AFTIDAVIl.PACE 3 or,3
ATTACHMENT 1
SERVICE AREA MAP
(1 PAGE)
Exhibit No.2
J. Palfreyman, Gem State Water Company
Page 4
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LYNNWOOD WATER PRICE LIST
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Exhibit No.2
J. Palfreyman, Gem State Water Company
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EXHIBIT 3
Asset Purchase Agreement
- This Exhibit contains trade secrets or confidential
material and is filed separately. -
(s3 PAGES)