20211130_jt1rq.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER R4PER
COMMISSIONER ANDERSON
COMMISSION SECRETARY
LEGAL
WORKING FILE
FROM:JOSEPH TERRY
TERRI CARLOCK
DATE:NOVEMBER 24,2021
RE:IN THE MATTER OF THE APPLICATION OF FALLS WATER
COMPANY,INC.FOR AUTHORITY TO INCUR DEBT TO ACQUIRE
REAL PROPERTY;CASE NO.FLS-W-21-02
On November 5,2021,Falls Water Company Inc.(“Company”or “Falls Water”)filed an
application requesting authority to issue up to $691,500 in debt to buy the office,warehouse,and
storage yard that the Company is currently leasing.According to the Application,the interest
rate on the loan is 0.99%for the first year,2.99%for years two through ten,and 6.5%for the
remaining five years.Application at 2.The Application was missing four items that are required
either by rule or statute:
1.Financial Statements showing the authorized and outstanding classes of securities
and certified copies of the resolutions of stockholders or directors authorizing the
proposed debt transaction.IDAPA 31.01.01.141.06
2.A proposed order granting the application.IDAPA 31.01.01.141.07
3.A statement that notice of the application has been published or will be published
withing seven (7)days of the of the application in newspapers in circulation in the
applicant’s service area.IDAPA 31.01.141.08
4.Application fee of 5259.25.Idaho Code §61-905
The Company included three exhibits with their application.The first exhibit is an
Indication of Interest from Zions Bank.The second exhibit isa legal description of the property.
The third exhibit is an appraisal for the property indicating the estimated market value is
$922,000.
DECISION MEMORANDUM -I -NOVEMBER 24,2021
On November 22.2021,the Company paid the application fee and filed a Statement of
Public Notice and Proof of Publication with the Commission,along with a Proposed Order.
Public notice of the Application was published in the Post Register in Bonneville County on
November 19,2021.Staff does not believe lack of financial statements should disquali’this
Application because the Commission has the 2020 Annual Report on file.For small water
Companies,the Annual Report is adequate for Staffs analysis.
STAFF ANALYSIS
The proposed debt meets the requirement under Idaho Code §61-901.The term is for
more than twelve months (15 years)and is for the express use of the acquisition of property used
for utility service.
Reviewing the Company’s 2020 Annual Report and most recent rate case (Case No.FLS
W-20-03).Staff believes the Company has the ability to meet the cash flow requirements of the
debt.The current lease payments are S3,496 per month but will increase to S5,500 per month if
the Company continues to lease the property.The Company stated that the monthly payments on
the Loan will be less that the S5.500 lease payments.Application at 3.The Company reported
in its 2020 Annual Report net income of $219,000.
The Indication of Interest from Zions Bank stated that the loan was for S737,000.while
the Application stated $691,500.The Company plans on a 25%down payment on the property
(Application at 2)while Zions Bank based its amounts on a 20%down payment.(Exhibit No.3
pg.1)The Indication of Interest also indicated that the interest rate for the final five years of the
loan would be based on the five-year US Treasury Index plus 2.00%,while the Application
stated 6.50%.The Company informed Staff that the 6.50%interest rate in the Application was a
“worst case scenario”but confirmed that the interest rate stated in the Indication of Interest was
correct.In current markets the five-year US Treasury Index rate is approximately 1.35%making
3.35%(1.35%±2%)the interest rate if issued today.
The new debt should not affect the Company’s capital structure significantly.In the
previous rate case.Case No.FLS-W-20-03,the Commission approved a hypothetical capital
structure that had a debt amount of S2.3M above what the Company had actually incurred.The
additional S69 1 ,500 will not impact the Commission approved capital structure.The
Commission also approved a weighted average debt interest rate of 3.5%.For the first 10 years
DECISION MEMORANDUM -2-NOVEMBER 24,2021
of the loan the indicated interest rate would be below the approved debt interest rate and
depending on the five-year treasury index the last five year may also be below that amount.
As part of the acquisition by NW Natural Water Company.LLC,Case No.FLS-W-1 8-01,
the Company would have better access to capital markets.This appears to be evident as the
interest rates are comparable to more recent interest rates achieved by larger companies.Avista
Corporation’s most recent debt issuance had an interest rate of 3.07%while Rocky Mountain
Power’s has a rate of 2.90%.
The Company requested the Commission determine prudency as much is feasible in this
case.Staff does not believe prudency of the purchased property should be determined in this
case.The time constraints imposed by Idaho Code §61-904 do not allow for proper analysis for
prudency.Staff recommends prudency be determined in the Company’s next general rate case.
STAFF RECOMMENDATION
Staff recommends that the Commission authorize the Company to issue up to $691,500 in
debt to purchase the property indicated in the Application.
Staff recommends the Commission require the Company to file with the Commission the
final loan documents showing the amount borrowed and all other terms of the loan within seven
days of those documents being available.
COMMISSION DECISION
Does the commission wish to approve Falls Water’s request to issue up to $691,500 in
debt to purchase the real property mentioned in the Application?
Does the Commission wish to require 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?
Aoseph
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Udmcmos/FLS-W-21-02 Decision Mcmo
DECISION MEMORANDUM -3-NOVEMBER 24,2021