20200313Decision Memo.pdf

DECISION MEMORANDUM
TO COMMISSIONER KJELLANDER
COMMISSIONER RAPER
COMMISSIONER AIVDERSON
COMMISSION SECRETARY
LEGAL
WORKING FILE
FROM:JOSEPH TERRY
DONN ENGLISH
DATE: MARCH 5,2020
RE:TETON WATER'S APPLICATION TO AUTHORIZE DEBT FOR
PURPOSE OF WELL CONSTRUCTION; CASE NO. TTS-w-20-0t
On February 20,2020, Teton Water & Sewer Company (Company) applied for authority
to issue up to S450,000 in debt in order to build a third well for the water system. The Company
did not include the filing fee, but the filing fee was calculated to be $ I 87.50 and was
subsequently received on F-ebruary 28,2020. In addition, the Company's included press release
had minor errors that were corrected before being delivered to the local newspapers. The
Company did not include financial statements with the Application, but provided unaudited
financial statements to Staffon February 26,2020.
The purpose of this loan is lbr planning, engineering, and construction of the water
systems' third well. The Company retbrenced Case Nos. TTS-W-17-01 and TTS-W-19-01 for
justilication for this well. The Company provided bids and estimates totaling 5385,519. Staff
reviewed those estimates and found them reasonable considering the geology of the area. The
Company is requesting authority lbr $450,000 in debt because once construction begins, costs
may vary from the estimates. On initial discussion with the lenders, the Company reported they
expect to receive a7-8%o interest rate and f'rve-year term. This loan rr*,ould be secured by the
assels of the Company, and the Company would like to have the loan secured by April 1,2020 in
order to have the well online for the 2020 peak demand season. Staff requests that the Company
file with the Commission the final loan documents when those documents become available.
If found prudent, the third well will have a significant impact to the Company's rate base.
In the Company's last general rate case (Case No. TTS-W-08-01), the Company's rate base was
DECISION MEMORANDUM MARCIT 5,2020
557,763. The Company's water revenues in its 2019 financial statements were $162,534, and the
gross income from the 2018 Annual Report was $35,808. Staffestimates that the annual
payment on a $384,5l9loan (the estimated cost of the project) atTYointerest with a five-year
term would be approximately $91,000. The Company's current rates are not sullicient to service
the loan.
Wells for water systems are typically depreciated over a period of 25-35 years. With a
five-year loan, a mismatch is created when recovery of investment is extended well beyond the
original terms of the loan. Assuming the above-mentioned depreciation life Staffestimates the
annual revenue requirement (depreciation and return on investment) from this project would be
approximately $51,000 or nearly $40,000 less than estimated loan payments, and therefore still
not sufficient to service the loan. Staff encourages the Company to attempt to secure loan
conditions that minimizelhe impact on customer rates, either by extending the loan beyond 5
years, or structuring the loan with a balloon payment that can be refinanced after the original
term. Staffrecognizes that changing the loan conditions may affect the interest rate the
Company willreceive. Absent more favorabte conditions, accelerated recovery of the third well
may be the only option to maintain the financial security of the company.
Staffrecognizes that projects of this size for small water companies are diffrcult and
commends the company on its proactive management of the water system.
STAFF RECOMMENDATION
Staff recommends the Commission approve the Company's request for authority to issue
up to $450,000 in debt for the third well.
Staff recommends the Commission order the Company to file with the Commission the
loan documents showing the amount borrowed and all other terms of the loan within seven days
of those documents being available.
DECISION MEMORANDUM -2-MARCH 5,2020
COI}TMIS$ON DECISION
Does the Commission wish to gnnt the Company authority to issu€ up to $450,000 in
debt?
Docs the Commission wish to orderthc filing requirement descriM?
Terry
Udmcmr'TTS-W-204| Boisioo Mcmo \2
DECISION MEMORANDUM -3-MARCH 5,2020