20181115Thompson Direct.pdf

Michael C. Creamer (ISB No. 4030)
Givens Pursley LLP
601 W. Bannock St.
Boise, lD 83702
Telephone: [phone]
Facsimile: (208) 388-l 300
mcc@ eivenspursley. com
Attorneys for SUEZ Water ldaho Inc.
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE JOINT
APPLICATION OF EAGLE WATER
COMPANY, INC. AND SUEZ WATER
IDAHO INC. FOR APPROVAL OF SALE
AND ACQUISITION OF EAGLE WATER
COMPANY, INC. ASSETS BY SUEZ
WATER IDAHO INC. AND AMENDMENT
OF CERTIFICATE OF PUBLIC
CONVENIENCE AND NECESSITY NO.
143, AND APPROVAL OF RATES AND
CHARGES
Case Nos. SUZ-W-18-02
EAG-W-18-01
DIRECT TESTIMONY OF MARSHALL THOMPSON
ON BEHALF OF SUEZ WATER IDAHO INC.
November 2018
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BACKGROUND
a. Please state your name and title.
A. Marshall Thompson, Vice President and General Manager of SUEZ Water Idaho
Inc. ("SUEZ" or "Company')
a. Please summarize your professional experience and educational background.
A. I am a graduate of Central Washington University with a Bachelor of Arts degrees
in both Geography and Earth Science. I completed my Master of Engineering and
Technology Management degree at Washington State University, where I also
received a Graduate Certification in Construction Project Management.
I have been employed by SUEZ since January 2012. Prior to becoming the
General Manager in July 2018 I worked as the Director of Operations, prior to
that I was the Assistant Manager in Training. Prior to working for SUEZ, I was
employed by the City of Spokane Washington in a variety of utility focused
technical roles.
a. What is the purpose of your testimony?
A. My testimony will provide background facts conceming the instant Application,
which seeks, among other things, Commission approval of the sale of Eagle
Water Company ("Eagle Water") assets to SUEZ and the amendment of SUEZ's
certificate of public convenience and necessity to incorporate Eagle Water's
certificated service area and customers.
a. Please identify the other witnesses who will testify on behalf of the Company
and the topics on which they will testify.
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M. THOMPSON, DI
SUEZ
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Ms. Jarmila Cary, Director of Finance with SUEZ, will testify regarding her
review and analysis of Eagle Water's financial condition and accounts as well as
her analysis related to operating cost projections and justification for a phased-in
tariff increase for Eagle Water customers if the asset acquisition is approved.
Ms. Cathy Cooper, Director of Engineering with SUEZ, will testify regarding
source of supply needs, anticipated capital costs for future plant upgrades to the
Eagle Water system and synergies and economies that would be realized for the
benefit of current Eagle Water and SUEZ customers if the asset acquisition is
approved.
Mr. Robert DeShazo, the President and General Manager of Eagle Water, also is
submitting testimony conceming the reasons for the proposed sale to SUEZ.
Please describe SUEZ.
SUEZ is a public utility corporation organized and existing under the laws of the
State of Idaho and is subject to the Commission's jurisdiction. SUEZ provides
water service to approximately 96,000 customers within the Cities of Boise,
Eagle, Meridian, and in unincorporated Ada County pursuant to Certificate of
Public Convenience and Necessity No. 143 as amended.
SUEZ is a subsidiary of SUEZ North America, which provides water and waste
recycling services to more than 7.5 million people in the United States and
Canada. SUEZ is the successor to the former United Water Idaho and Boise
Water Company, which have cumulatively provided continuous, regulated water
service to the Treasure Valley for over 100 years.
Please explain why SUEZ wishes to acquire Eagle Water Company.
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SUEZ
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A SUEZ, in one form or another, has been the water service provider to the greater-
Boise area for many years. Throughout our history, the Company has
continuously evaluated acquisition opportunities that would further our
commitment to providing reliable service to our customers.
The Company recognizes that serving a growing customer base requires ready
access to low-cost capital and the ability to maintain or replace aging
infrastructure. The escalating costs for compliance with increasing state and
federal regulations make the need for qualified utility management that much
greater. With this in mind, the Company has acquired several local public water
systems faced with financial or regulatory challenges. SUEZ's acquisitions of the
South County Water and Brian Subdivision HOA systems are recent examples.
Many of the above factors also come into play with respect to this Application.
Coincident with Mr. DeShazo's desire for an orderly succession of service from
Eagle Water to another provider, is the close geographic linkage of the SUEZ and
Eagle Water Certificated Areas. The Company has long considered acquisition of
the Eagle Water service area to be a prudent business opportunity if and when
circumstances presented themselves.
The Eagle Water Company service area is contiguous to SUEZ's on three fronts.
It has experienced significant residential and commercial growth largely within
planned developments that are relatively easy to serve. The contiguity of the two
service areas also has on occasion been a source of friction between the two
providers in terms of who should be entitled to extend service to new customers at
their margins.
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SUEZ
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In sum, the Eagle Water asset purchase presents opportunities for:
a. Growth of the SUEZ water system and customer base;
b. Providing high quality service to additional customers through proven
experience and ability to fund necessary infrastructure;
c. Interconnection to portions of the SUEZ system that are currently isolated;
d. Optimizing efficiencies in storage and supply between the SUEZ and
Eagle Water systems for the benefit of SUEZ customers as well as the
current Eagle Water customers;
e. Obtaining additional and redundant sources of supply in the northwest
portion of the SUEZ water system; and
f. Providing a means of orderly succession in management and operation of
the Eagle Water system and continuity of quality service to its customers.
THE PROPOSED ACOUISITION OF EAGLE WATER COMPANY ASSETS
a. Please describe Eagle Water Company.
A. Eagle Water Company is a private, regulated water utility with approximately
4,200 customers. Their service area covers portions of the City of Eagle and
unincorporated Ada County. A map showing Eagle Water's current service area
and significant facilities is included as Attachment I to the Joint Application.
a. Please describe the structure of the proposed transaction.
A. The parties have structured this transaction as an asset purchase by which SUEZ
would acquire by deed or ground lease properties whereon Eagle Water wells and
booster pumps are located, all appurtenant or in-gross easements for water system
facilities, all govemmental authorizations, all personal property used by and for
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SUEZ
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the operation of the Eagle Water system, customer accounts, deposits and hook-
up fees and all water rights (the "Assets").
In May of 2018, H2O Eagle Acquisitions, LLC a Wyoming limited liability
company ("HzO Eagle"), negotiated an assignable Asset Purchase Agreement
with Eagle Water (the "Eagle APA") with the understanding that the Assets
ultimately could be acquired by a qualified third-party such as SUEZ. At
approximately the same time, H2O Eagle approached SUEZ inquiring whether it
had an interest in acquiring the Eagle Water system. At that time a non-binding
letter of interest was signed by H2O Eagle and SUEZ setting out basic
expectations and a due diligence process that would precede entering into a
definitive purchase and sale agreement.
On September 20,2018 H2O Eagle and SUEZ entered into an Asset Purchase
Agreement (the "H2O-SUEZ APA") that substantially mirrored the May 2018
Eagle APA. The H2O-SUEZ APA provided that H2O Eagle would cause the
Eagle APA to be amended to, among other things, include additional due
diligence and contingency provisions, and provide that Eagle Water would
cooperate with SUEZ in presenting the proposed purchase and sale to the
Commission for approval.
The H2O-SUEZ APA sets a cash purchase price of $10 Million, with a deposit
into escrow following execution of $100,000 to be applied to the purchase price at
closing. Ten thousand dollars of the deposit is deemed non-refundable. SUEZ's
obligation to close the purchase and sale is expressly contingent upon approval of
the transaction by the Commission on terms acceptable to SUEZ.
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SUEZ
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Please describe how the purchase price was determined.
The purchase price was determined by an arm's length negotiation between SUEZ
and H2O Eagle, and was based on SUEZ's evaluation of the underlying value of
Eagle Water Assets. The purchase price equates to approximately $2,380 per
Eagle Water customer. For comparison purposes, SUEZ's investment per
customer as of November 2015 per Case No. UWI-W-I5-01 was approximately
$1,924. See Direct Testimony of Jarmila Cary, p. 3,1. 17-21. SUEZ's valuation
methodology and conclusions and its avoided capital investment analysis
supporting the purchase price is described in Ms. Cooper's testimony.
What relationship does the negotiated purchase price bear to the book value
of the Assets?
This information is provided in detail in Ms. Cary's and Ms. Cooper's testimony.
However, based on Eagle Water's records of accounts, a per book calculation of
rate base as of December 31, 2017 is approximately a negative 91,208,792. For
purposes of its analysis in connection with the proposed acquisition and this
filing, SUEZ has assumed a rate base of zero. Consequently, SUEZ is requesting
that the Commission approve the purchase and sale with an acquisition
adjustment.
What treatment is SUEZ seeking with respect to the acquisition adjustment?
SUEZ is seeking Commission approval to include the full purchase price in rate
base and to amortize the acquisition adjustment over an appropriate period of
time-proposed as forty years-to represent the approximate average life of water
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SUEZ
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system assets. The acquisition adjustment and the amortization thereof would be
included in the Company's next base rate case.
Why should the Commission allow recognition of the acquisition adjustment
in rate base?
SUEZ believes that the purchase price and acquisition adjustment are supported
by avoided capital investment as discussed in detail by Ms. Cooper. Also, SUEZ
thinks it is appropriate to recognize that, like many private, regulated water
systems in Idaho, the Eagle Water system consists of significant vintage facilities
that have been largely or fully depreciated and much of the newer facilities have
been funded in some significant part by contributions in aid of construction
("CIAC"). Also, although largely or fully depreciated on Eagle Water's books, its
plant in service continues to have a fair value component both in terms of its
remaining service life and the extent that portions of the plant would represent
avoided costs for SUEZ' own operations.
In the instant case, a purchase price based solely on net book value also would not
be expected to provide sufficient consideration to bring the assets to the market
regardless of other factors that make a sale or a purchase the prudent course. The
owner reasonably expects that his or her long-term investments (personal and
financial) in developing the business, the system and the customer base, together
with the revenue stream of in-service plant, will continue to generate income
regardless of book value, and warrants a purchase price that appropriately takes
these factors into account.
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SUEZ
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SUEZ believes that the purchase price represents a fair value that takes all these
factors into account and provides the necessary consideration to make a sale that
ultimately should happen, happen.
Are you seeking to increase rates for Eagle Water customers as a result of the
acquisition?
Yes. Suez believes that the Eagle Water system has suffered from less than optimal
capital investment for some time. SUEZ's due diligence review of the Eagle Water
system and SUEZ's standards for plant maintenance, upgrades and replacements
indicate that some substantial capital investments in plant should be scheduled over
the next several years. The rate structure that SUEZ proposes is intended to reflect
projected costs required to correct identified deficiencies over a reasonable time
period while minimizing rate-shock.
The Company proposes a phase-in to full SUEZ tariff rates over a period of three
years. This is justified by contemplated capital investments that will directly benefit
the customers formerly served by Eagle Water. During the phase-in period, former
Eagle Water customers would have a separate rate schedule from other SUEZ
customers. While the Company acknowledges this it is not an ideal situation to have
customers of the same company experiencing different rates, Eagle Water's rates
are currently lower than SUEZ's. Eagle Water base rates have not increased since
1992, although there have been several surcharges approved in that time. This
multi-year phase-in will provide customers the opportunity to take whatever steps
they so choose to adjust water consumption patterns. The proposed phase-in would
reflect a percentage of SUEZ's tariff rate so that ultimately rates will be uniform
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SUEZ
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and be automatically adjusted for any overall rate charges approved by the
Commission in the future. SUEZ's proposed phase-in is detailed in Ms. Cary's
testimony.
Would new customers in the Eagle Water company area be subject to the
phased in rate structure?
No, we are requesting that post-closing any newly-established customer accounts-
including new customers changing an account for an existing connection in the
expanded SUEZ service area-would commence service at regular SUEZ rates.
What is the Company's proposed treatment of main extensions and other
tariff issues following the purchase?
The Company is proposing to adopt the Eagle Water service area and customers
immediately following closing under SUEZ' applicable tariff rules and regulations.
Please describe your plans for making improvements to the Eagle Water
system.
These capital improvements are discussed in Ms. Cooper's testimony.
Are you seeking approval of these improvements in this filing?
No. SUEZ intends to include them in future rate cases after capital improvements
have been completed.
Are there identifiable synergies or efficiencies that will result from this
acquisition?
Yes. Earlier in my testimony I indicated that the Eagle Water asset acquisition
would provide certain efficiencies that would benefit customers in both service
areas. These include the interconnection with Eagle Water facilities of SUEZ
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SUEZ
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facilities that currently are isolated. The two systems have water storage and
sources that when integrated could be used to optimize dispatching water for
overall demand and peak and fire flow needs.
With the interconnection of the two systems, customers will benefit from shared
access to storage facilities and additional sources of supply. SUEZ customers
currently have a rated water supply capacity per customer of approximately 979
gpd/customer (94 MGD I 96,000 customers), while Eagle Water Company
customers have a rated water supply capacity per customer of 2,810 gpd/customer
(11.8 MGD I 4,200 customers). This difference is due to Eagle Water Company
having to pump peaking, fire flow, and provide a redundant well since it does not
have storage tanks.
Additionally, Eagle Water customers ultimately would benefit from lower
operating expenses and increased capital investment. SUEZ is prepared to offer
additional services to the expanded customer base, including:
1) 24-hour automated system monitoring;
2) Numerous field personnel trained and certified in water distribution, water
treatment, and cross connection control that are able to respond quickly to any
issues;
3) Web site access for customers;
4) Electronic billing and payment options;
5) Greater financial stability and access to the capital markets with related ability
to fund projects at lower cost;
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SUEZ
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6) The ability to take advantage of economies of scale and buying power not
currently available to Eagle Water;
7) Water conservation programs and no-cost conservation devices;
8) The ability to maintain the water system in regulatory compliance;
9) The ability to spread costs of Eagle area capital improvements over a large
customer base and avoidance of future surcharges.
What impacts on current Eagle Water Company customers does SUEZ
anticipate?
SUEZ believes service quality will be positively impacted. SUEZ employs over
sixty field personnel trained and certified in water distribution, water treatment,
and cross-connection control. SUEZ also maintains full-time maintenance crews
and sufficient materials in inventory to rapidly repair damaged facilities and
restore service after an emergency outage without relying on contractor or supply
house availability. The addition of full time SCADA monitoring to the system
will allow SUEZ staff to monitor sites remotely twenty-four hours per day, which
will expedite responses to operating problems and/or emergency situations.
What impacts on current SUEZ customers and operations does SUEZ
anticipate?
SUEZ customers will realize a cost savings in SUEZ acquiring additional and
redundant water supply. This is explained more in Ms. Cooper's testimony
related to SUEZ's contemplated avoided capital investment.
What billing schedule does SUEZ anticipate?
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SUEZ
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Eagle Water customers currently are billed monthly. SUEZ anticipates
continuing monthly billing for these customers.
How will SUEZ communicate with Eagle Water Company and SUEZ
customers regarding the acquisition?
SUEZ has developed a communications plan related to the acquisition. An
outline of this plan is included below in my testimony. By way of summary, this
plan will include town hall meetings, press releases, social media posts, a landing
page for new customers on the SUEZ website with specific acquisition
information, notices, and a welcome packet for Eagle Water customers.
Specific information on water conservation will be provided in the Company's
welcome packet to new customers. This will assist them in reducing their water
use and associated water bills to be comparable to other SUEZ customers ahead
of full rate adoption.
Communications Plan Outline - Pre and Post Closine Activities
o Press release and customer notice (accompanying the Joint Application)
o Micro-Website Available (Pre-Closing)
o Press Release (Pre-Closing)
r External Stakeholder Outreach to Municipal Offices and Regulatory
Agencies (Pre-Closing)
o Customer Mailings and New Customer Welcome Packets (Pre and Post
Closing)
o Location Targeted Social Media Advertising (Pre and Post Closing)
o Print Advertising (ldaho Statesman) (Pre and Post Closing)
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SUEZ
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a Town Hall Events and Facility Open Houses (Pre and Post Closing)
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a. Do you believe the acquisition of Eagle Water by SUEZ is in the public
interest?
A. Yes, for all of the reasons stated above.
Does this conclude your testimony?
Yes.
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SUEZ