20040825Wyatt Direct.pdf

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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF UNITED WATER IDAHO INC.
FOR AN AMENDMENT TO ITS CER TIFICA TE OF PUBLIC CONVENIENCE
AND NECESSITY NO. 142 AND FOR AN ACCOUNTING ORDER
Case No. UWI-O4-
DIRECT TESTIMONY OF GREG WYATT
FOR UNITED WATER IDAHO INC.
Please state your name.
Gregory P. Wyatt
What is your position?
I am the Vice President and General Manager of United Water Idaho.
When did you assume your duties as General Manager of United Water Idaho?
January of 2000.
What is the purpose of your testimony?
I will explain the history of the Carriage Hills non-contiguous project, the details
of the proposed sale to the City ofNampa and the underlying rationale for the
transaction.
Please describe the early history of the Carriage Hills project.
As I understand it, on December 7, 1998 United Water Idaho and the Carriage
Hills developers entered into a Residential or Multiple Family Housing Non-
contiguous Water System Agreement and the Commission subsequently approved
the A.greement. At the same time the Carriage Hills developers and United
Waterworks, United Water Idaho s parent, entered into an understanding that
United Waterworks would loan the developers up to $350 000 to finance the
construction of the Carriage Hills source of supply system only. This
understanding was documented in a Design-Build Promissory Note signed by the
developers dated December 7, 1998. In addition, there was also a Joint and
Sevt~ral Individuals' Guaranty executed the same date by the developers in favor
of United Waterworks as guarantee for the Promissory Note. For a period of time
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United Water
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after that the project proceeded as expected-the system was installed; lots were
developed and sold within the subdivision; Carriage Hills made payments to
United Waterworks for the period beginning February 5 , 2000 through November
, 2001.
In the year 2002 did problems with the project start to develop?
Yes. Due, I believe, to the softening economy, sales of lots within the subdivision
sloVt'ed and the Carriage Hills developers were, as a result, unable to make the
required payments to United Waterworks. The Promissory Note became
delinquent.
What happened next?
We continued to pursue collections on the loan. We made numerous contacts
with the developer requesting payment. We discussed loan refinancing with our
corporate accounting and treasury departments and subsequently made proposals
to the developer regarding a potential refinancing of the loan. The developer
eventually made an interest only payment in the amount of $16 232.64 in August
2002 to bring the existing loan current from November 5, 2001 through August 5
2002. A loan refinancing never occurred.
Did other factors arise?
Yes. As initially constructed the development had only one well, with both a
domestic and fire pump, to serve as the source of supply. In the spring of 2002
the developer had embarked on Phase II of the distribution system that would add
20 lots to the original 27 in Phase I. Eventually, twenty-five lots would be
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United Water
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connected, the maximum permitted by the Department of Environmental Quality
for a system with only one source well. The Carriage Hills developers did not
have the funds to construct a second source of supply and further growth within
the subdivision was jeopardized.
What was the status of the project in early 2003?
It was precarious. The Carriage Hills developers informed me that they did not
have funds either to continue payments to United Waterworks or to drill a new
well. Without a second source of supply the project would not be able to expand
and thereby generate funds to finance the new well or to pay United Waterworks.
What did you do in response to this situation?
At the developer s request, and working in conjunction with the developer, I
began to explore possible solutions to the situation.
What did you first explore?
First, we attempted to determine whether an interconnection agreement with the
City ofNampa would be possible as a way to provide the second source of
supply. I quickly learned that the City was not interested in such an arrangement.
What occurred next?
While the City was not interested in an interconnection, the City did express an
interest in acquiring the system. So, in August of 2003 we started discussions
with the City for the sale of the system. The City performed its own due diligence
on the system and at the same time we began work on a memorandum of
undt~rstanding which would lead to a sale agreement. A Memorandum of
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Understanding dated October 15 2003 was executed. We also began negotiations
regarding the system sale price.
Ho\\' long did the negotiations take?
A final purchase and sale agreement was signed on March 12 2004.
What was your goal during the negotiations?
As noted earlier, United Water Idaho did not employ me at the time the Carriage
Hill project commenced and I inherited a problematic circumstance in which
litigation was becoming a distinct possibility. My goal was to devise a solution
whereby United Water Idaho s customers were not harmed and the expectations
of all parties were not frustrated. The commencement of litigation against
Carriage Hill by United Waterworks or United Water Idaho would in my opinion
have not been cost efficient since such litigation would be costly and might not
produce any enforceable judgment.
During your negotiations what did you learn about the City s motivations?
It became apparent to me that the City believes multiple water suppliers within its
boundaries, or even nearby to its borders, is not in the best interests of its citizens.
The City was specifically interested in a solution that involved United Water
Idaho exiting the area.
Did the existence of these negotiations have an impact on the issue with DEQ
regarding a second source of supply?
Yes. The prospect that the matter could be resolved through negotiation gave
DEQ enough comfort to temporarily waive the 25-customer cap and to permit the
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connection of ten additional lots to the domestic water system. This occurred in
November of2003.
During the course of these negotiations what were the nature of your
communications with your immediate supervisor and United Water s corporate
office?
After learning that the city of Nampa had an interest in acquiring the system, I
sought and received approval from my immediate supervisor, the western region
manager, and a member of the United Water executive management team, to
enter into negotiations for the sale. I developed and communicated a scenario in
whi(~h United Water Idaho would be reimbursed fully for all its investments in the
system, United Waterworks would be made whole on the outstanding debt, and
the City ofNampa would accomplish its goal of providing water service to all the
citizens in this area. Throughout the negotiations I involved our corporate legal
department in reviews of both the Memorandum of Understanding as well as the
Purchase and Sale Agreement.
What is the agreed sale price for the system and how was it arrived at?
The sale price is $375 000 and it was arrived at through arms length negotiations.
The City retained its own engineering consultant to evaluate the system and the
City made an independent judgment as to the amount it was willing to pay.
goal at this point was to obtain a sale price that would produce sufficient funds to
make United Water Idaho and United Waterworks whole.
Ho\\' will the proceeds from the sale be distributed?
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United Water
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There will be some final adjustments at closing, but approximately $339 000 will
be paid to United Waterworks and approximately $36 000 will be paid to United
Water Idaho.
Ho\\' does United Water propose to account for the funds it will receive?
The proposed accounting is shown on Exhibit E to our Application. I am
attaching to this testimony a Revised Exhibit E. Inadvertently, the initial Exhibit
E did not include $50 428 of distribution plant that was contributed by the
developer for Phase II of the Carriage Hills project and booked in November
2003. Revised Exhibit E includes this additional contributed plant and shows the
corrected amortization calculations.
Revised Exhibit E reflects Advanced Plant in Service of$354 905.74 and
Contributed Plant in Service of$190 300.59. Isn t United Water Idaho
transferring valuable property without receiving any consideration for its
investment in the property?
No. It is important to remember that in the case of both contributed plant and
advanced plant, these investments are not made with rate-payer supplied funds;
the funds for these investments are provided by the developers. The advanced
plant reflects the source of supply portion of the system and was provided by the
developer, albeit United Waterworks loaned a significant portion of the funds to
the developer for the source of supply. The contributed plant reflects the
distribution portion of the system and was fully funded by the developer. United
Water Idaho s customers were never at risk with respect to these investments.
Wyatt, Di
United Water
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Because advanced plant and contributed plant are not included in the Company
rate base, customers have not, though their rates, paid any return on those
investments. United Water Idaho s customers have not acquired any financial or
equitable interest for which they should be compensated upon sale of the assets.
United Water Idaho s only "real" investments are in the source of supply in the
amount of$13 600, and customer meters in the amount of$3 000, (before
depreciation). Even then, those investments were primarily made through refunds
as customers were connected, (the $13 600) thereby insulating United's customers
from speculative risk.
United Water Idaho s customers are further protected by the fact that the
sale price, and thus the accounting, is sufficient to cover United Water Idaho
miscellaneous costs outstanding related to the project, (MJ Cost #2537 and 2849)
as well as legal costs associated with the IPUC filing process.
On Revised Exhibit E in the category "Miscellaneous Plant & Other" there is an
item entitled "Refunds Payable to Carriage Hill at closing." Please explain this
item.
Under the Non-Contiguous Agreement with Carriage Hills, United Water Idaho
was obligated to refund to Carriage Hills $800 per connected lot to reimburse the
developers for their investment in source of supply. When Carriage Hills became
delinquent in its loan repayment obligations, United Water Idaho suspended the
refund payments. To me this seemed like a reasonable business decision and it
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created an incentive for Carriage Hills to work seriously toward a resolution.
closing Carriage Hills will be fully compensated for refunds due.
In the same category on Revised Exhibit E there is an item "Legal & IPUC Filing
Expenses.Why are you proposing that these expenses be the responsibility of
United Water Idaho rather than United Waterworks?
The issue is not about who has responsibility for these costs because the sale price
contemplates these costs being reimbursed regardless of which business unit the
accounting is handled under. United Water Idaho is the local business unit for
which I have primary responsibility for and access to the books and records.
seenled logical to me to process these costs through United Water Idaho s local
accounting rather than through a corporate entity since reimbursement of these
costs is provided for in the sale price either way.
Ho\\' will the funds received by United Waterworks at closing be allocated?
Assuming a closing on October 15 2004, the total amount of$338 601.00 would
be paid to United Waterworks as follows: accrued interest of$47 551.00;
outstanding loan principle in the amount of $262 346.00 and a risk premium in
the amount of $28 704.00.
If the sale price includes some profit, or risk premium, why is it appropriate for
United Waterworks to receive that amount rather than United Water Idaho?
To me it seems fair that United Waterworks receive the risk premium because it is
the t:ntity that faced the risk of project failure. As previously referenced, United
Water Idaho has only a small investment in the project and all of that investment
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will be reimbursed through the sale proceeds. United Water Idaho s general body
of customers faced no risk in the project because United Water Idaho primarily
made investments in the project through the payment of refunds per connected lot
when there was revenue to support the investment.
Will United Water Idaho s general body of ratepayers be harmed in any sense by
the transaction?
No. The effect of the accounting entries shown on Revised Exhibit E will be to
reduce the revenue requirement associated with Carriage Hills to zero.
What will be the effect upon United Water Idaho s current customers in the
Carriage Hills subdivision?
They will obtain water service from a dependable municipal supplier at rates that
are lower than United Water Idaho s rates.
If this transaction is approved as proposed, will it create any precedent for future
cases?
I do not believe so. This is a unique solution to a unique set of circumstances.
There are no other non-contiguous projects in which United Waterworks operates
as a financier, and I would not anticipate there would be any in the future.
If for some reason the transaction fails, will there be negative consequences?
Yes, several. First, the City of Nampa has approved the Purchase Agreement and
already established a Local Improvement District on the lands the developer seeks
for future development contiguous to the Carriage Hill Subdivision, and the LID
will help provide funding for the water system purchase. The City already has
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water facilities near the Carriage Hill area and has expressed strong interest in
serving those customers. The City also has now planned to use the Carriage Hill
well in lieu of drilling an additional source in the area. If the transaction fails, all
of these interests of the City ofNampa will be thwarted. Without the transfer of
the Carriage Hill system to N ampa water service to the area will be uncertain.
Givtm that the City has expressed its preference for United Water Idaho
departure it is possible that Nampa will extend water service to the surrounding
areas and United Water Idaho s Carriage Hill system will be an island without
any real potential for expansion. Without the transaction going ahead as planned
the relations between the City ofNampa and United Water Idaho would be
strained significantly.
In addition, if the transaction fails the developers of Carriage Hill will be
required to provide funding for a second well source for the existing phases of the
development. This now seems duplicative since the City of Nampa is willing to
provide the required second source via acquisition and interconnection to their
system. Finally, if the transaction fails United Waterworks will likely have no
other option than to pursue recovery of the outstanding loan through a legal
process. It is my opinion that if United Waterworks proceeds to sue the developer
it will cause significant and potentially irreversible harm to United Water Idaho
reputation with the developer community in Boise and the surrounding
community.
Could you please summarize why the transaction should be approved.
Wyatt, Di
United Water
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I believe the transaction should be approved as filed because it is the only solution
that provides for all parties interests being satisfied. Under the proposed
transaction United Water Idaho s investments are reimbursed in full; its customers
are not harmed or penalized; the City of N amp a acquires a stable source of water
in a growing portion of their service area; the Carriage Hills customers receive
water service from a dependable municipal provider at rates that are lower than
United Water Idaho s; and United Waterworks is made whole on its outstanding
loan, thus avoiding potential litigation with the developers.
Does that conclude your testimony?
Yes.
Wyatt, Di
United Water
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United Water Idaho
Proposed Journal Entry to Record Carriage Hill Sale
(Assumes Closing As of October 15, 2004)
Account
Number Debit Credit
UNITED WATER IDAHO:
Advanced Plant- Reverse original cost plant; reverse book amount
of advance liability; reverse accum depr on refunds made; book
cash from City of Nampa
Plant in Service 101-000 354 905.
Advances for Construction 252-000 341 305.
Accumulated Depreciation 108-010 179.41
Cash 131-000 11,420.
354 905.354 905.
Contributed Plant- Reverse original cost plant; reverse
CIAC;reverse amort of CIAC
Plant in Service 101-000 177,438.
Contributions in Aid of Construction 271-000 177,438.
Accumulated Depreciation 108-010 861.
Accumulated Amortization of CIAC 272-000 861.
190,300.190,300.
Miscellaneous Plant & Other:
PIS Meters 101-000 000.
Accumulated Depreciation 108-010 231.
MJ Cost #2537 & 2849 186-025 5,409.
Legal & IPUC Filing Expenses 143-000 500.
Refunds Payable to Carriage Hill closing 232-000 10,400.
Cash 131-000 078.
Total UWID Debits and Credits
309.309.
569 515.569,515.
Total Cash 35,498.
Case No. UWI-W-O4-03
Revised EXHIBIT E