20200310_jt2jo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER RAPER
COMMISSIONER ANDERSON
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-20-01
On February 20,2020,Teton Water &Sewer Company (Company)applied for authority
to issue up to $450,000 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 $187.50 and was
subsequently received on February 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 Staff on February 26,2020.
The purpose of this loan is for planning,engineering,and construction of the water
systems'third well.The Company referenced Case Nos.TTS-W-17-01 and TTS-W-19-01 for
justification for this well.The Company provided bids and estimates totaling $385,519.Staff
reviewed those estimates and found them reasonable considering the geology of the area.The
Company is requesting authority for $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 a 7-8%interest rate and five-year term.This loan would be secured by the
assets 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 -1 -MARCH 5,2020
$57,763.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.Staff estimates that the annual
payment on a $384,519 loan (the estimated cost of the project)at 7%interest with a five-year
term would be approximately $91,000.The Company's current rates are not sufficient 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 Staff estimates 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 minimize the 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.Staff recognizes that changing the loan conditions may affect the interest rate the
Company will receive.Absent more favorable conditions,accelerated recovery of the third well
may be the only option to maintain the financial security of the Company.
Staff recognizes that projects of this size for small water companies are difficult 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
COMMISSION DECISION
Does the Commission wish to grant the Company authority to issue up to $450,000 in
debt?
Does the Commission wish to order the filing requirement described?
|seph Terry
Udmemos/TTS-W-20-01 Decision Memo V2
DECISION MEMORANDUM -3 -MARCH 5,2020