20190429Palfreyman Direct.pdf

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ATTACHMENT 1
GEM STATE WATER COMPANY
DIRECT TESTIMONY OF
JUSTNPALFREYMAN
-, 1)
Preston N. Carter (ISB No. 8462)
Givens Pursley LLP
601 W. Bannock St.
Boise, lD 83702
Telephone: [phone]
Facsimile: (208) 388-1 300
prestoncarter@ givenspursl ey. com
I 4641262 _1 .docx I I 3988.3]
Attorneys for Gem State Water Company, LLC
IN THE MATTER OF THE APPROVAL
OF ACQUISITION OF THE ASSETS OF
DIAMOND BAR ESTATES, L.L.C.
AND BAR CIRCLE "S" WATER, INC.;
FOR TRANSFER OF CERTIFICATES
OF PUBLIC CONVENIENCE AND
NECESSITY OF DIAMOND BAR
ESTATES, L.L.C. (NO. 413) AND BAR
CIRCLE "S" WATER, INC. (NO. 296);
AND REQUEST FOR MODIFIED
PROCEDURE
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
CaseNo. BCS L,J- Iq- D t // pt n -N- lq-0/
DIRECT TESTIMONY OF JUSTIN PALFREYMANI
ON BEHALF OF GEM STATE WATER COMPANY, LLC
April29,2019
BACKGROUND
a. Please state your name and title.
A. Justin Palfreyman, President of Gem State Water Company, LLC ("Gem State Watel'). I
also serve as the President of NW Natural Water of Idaho, LLC ("NW Natural Water of Idaho")
and NW Natural Water Company, LLC ("NW Natural Water").
a. Please summarize your professional experience and educational background.
A. I have worked for 16 years in strategy, finance and corporate development functions. I
most recently worked as a Director inLazard's Power, Energy and Infrastructure Group in New
York, where I provided strategic and financial advice to corporations, institutional investors,
private equity funds and government clients. My advisory assignments related to general
strategic advice; mergers, acquisitions and divestitures; raising capital; restructurings; corporate
preparedness/takeover defense; and capital structure optimization. Prior toLazard,I worked in
the Infrastructure Investment Banking Group at Goldman Sachs in New York. I also previously
held various positions in finance, strategy and business development at both Apex Learning and
Accenture in Seattle, Washington.
I hold an MBA from the University of Chicago Booth School of Business, a Master's of
Public Policy from The University of Chicago Irving B. Harris School of Public Policy and a
Bachelor's of Business Administration from Pacific Lutheran University.
a. What is the purpose of your testimony?
A. My testimony is offered to provide the Idaho Public Utilities Commission (the
"Commission") and Commission Staff with information regarding Gem State Water's proposed
acquisition of the assets of Diamond Bar Estates, L.L.C. ("Diamond Bar") and Bar Circle "S"
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Water, Inc. ("Bar Circle").
a. Please describe NW Natural Water, and the relationship among NW Natural Water,
NW Natural Water of Idaho, Gem State Water, and other related companies.
A. NW Natural Water is a wholly owned subsidiary of NW Natural Holding Company
("NW Natural Holdings"). NW Natural Holdings, which is headquartered in Portland, Oregon,
is a publicly owned company with a market cap of approximately $ 1 .8 billion. It has revolving
credit facilities aggregating to approximately $400 million. NW Natural Holdings' Form 10-K
for 2018 filed with the Securities and Exchange Commission on March I,2079, is attached as
Exhibit 1.
NW Natural Water was created to own and operate water utilities, through subsidiaries,
in Oregon, Washington, and Idaho. NW Natural Water also has significant financial assets. It
currently owns and operates three water utilities, including Falls Water in eastern Idaho.
Gem State Water is a wholly owned subsidiary of NW Natural Water of Idaho, which is
in tum wholly owned by NW Natural Water. Gem State Water was created to operate water
utilities in Idaho, including Diamond Bar and Bar Circle. Gem State Water and NW Natural
Water of Idaho will have access to the financial resources and the utility expertise of NW Natural
Water, NW Natural Holdings and their affiliates.
An organizational chart illustrating NW Natural Holdings' corporate structure is attached
as Exhibit 2.The chart has been designated "Confidential" per Commission rules.
a. Please describe NW Natural Water's interest in, and recent acquisitions, in the
water sector.
A. In recent years, leadership of the NW Natural family of businesses undertook a
comprehensive strategic review process to identifu and evaluate potential growth opportunities
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that, among other criteria, would offer a risk profile consistent with our core utility business and
a long-term opportunity to grow beyond our existing business. The outcome of the strategic
review process was a strategy and plan to pursue opportunities in the water utility and
infrastructure sector, in addition to the ongoing focus on our 160 year old gas utility, storage and
infrastructure business. We believe that a water strategy is a compelling fit for NW Natural
because it would build on our core competencies of constructing, operating and maintaining
infrastructure, providing best-in-class customer service, ensuring safety and reliability, and
effectively managing a regulated utility.
NW Natural Water has been actively pursuing this strategy. NW Natural Water recently
acquired, and is currently operating, three water companies through direct or indirect
subsidiaries. These companies include Falls Water in eastern Idaho; Cascadia Water, LLC, in
Washington; and Salmon Valley Water Company in Oregon. By owning and operating these
water utilities, NW Natural Water has gained valuable experience in the water sector. These
acquisitions, and the continued operation of these water utilities, were seamless, with no
disruptions to customers' service. NW Natural Water will bring this experience to Gem State
Water. Recently, Gem State Water filed an application with the Commission to acquire the
assets of Spirit Lake East Water Company and Lynnwood Water, and the Commission is
considering that application (Case No. SPL-W-19-01).
THE TRANSACTION
a. Please describe Diamond Bar.
A. Diamond Bar is a privately owned, rate-regulated water utility located in or near
Kootenai County in northern Idaho. I understand that Diamond Bar serves approximately 46
customers. Diamond Bar holds Certificate of Public Convenience and Necessity ("CPCN") No.
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4t3.
a. Please describe Bar Circle.
A. Bar Circle is a privately owned, rate-regulated water utility located in or near Kootenai
County in northem Idaho. I understand that Bar Circle serves approximately 218 residential
customers and one commercial customer. Bar Circle holds CPCN No. 296.
a. Why is Gem State Water interested in acquiring the assets of Diamond Bar and Bar
Circle?
A. Acquiring these assets fits squarely into NW Natural Water's continued growth in the
water sector. Gem State Water, NW Natural Water of Idaho and NW Natural Water believe that
Diamond Bar and Bar Circle are well-run and well-maintained. However, like many water
utilities, the water systems are in need of capital investment to support system growth and
maintain system integrity. Gem State Water, NW Natural Water of Idaho and NW Natural
Water have the financial strength to support these needs. These two systems also give Gem State
Water, NW Natural Water of Idaho and NW Natural Water an expanding platform for potential
additional acquisitions in Idaho. Gem State Water, NW Natural Water of Idaho and NW Natural
Water also believe that the acquisitions will provide a seamless transition from the current
ownership of Diamond Bar and Bar Circle.
a. Please describe the proposed transaction to acquire Diamond Bar and Bar Circle.
A. Gem State Water and the selling parties entered into an Asset Purchase Agreement
("Agreement") and an Addendum to Asset Purchase Agreement ("Addendum"),1 both effective
as of March 14,2019. Under the Agreement and Addendum, attached as Exhibit 3, if approved
I Very generally speaking, the Addendum addresses the disposition of aspects of certain pending activities by
Diamond Bar and/or Bar Circle.
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by the Commission, Gem State Water will acquire substantially all the assets of Diamond Bar
and Bar Circle, as well as the assets of Bar Circle "S" Ranch, Inc. ("Ranch"), zn unregulated
company.2 Gem State Water intends to acquire the substantially all the assets of Diamond Bar
and of Bar Circle through the transaction, to serve existing and future customers of these water
systems, and to maintain or improve the existing level of services without any disruption to
customers. The Agreement and Addendum are designated "Confidential" per Commission rules
a. Is Gem State Water asking for any other action by the Commission?
A. Yes. Gem State Water is seeking Commission approval to transfer Diamond Bar's
CPCN No. 413 and Bar Circle's CPCN No. 293 to Gem State Water.
a. Is Gem State Water seeking to change rates for Diamond Bar or Bar Circle
customers through this transaction?
A. No. Gem State Water is not seeking to change rates, rate structure, or other charges for
Diamond Bar or Bar Circle customers through this transaction. The current rate structure, rates,
and other charges will remain the same for each customer group. We understand that Idaho law
authorizes the Commission to provide for acquisition adjustments in certain circumstances for
entities acquiring water utilities in the State, but Gem State Water does not seek an acquisition
adjustment with this particular transaction, and Gem State Water will not seek any increase to
rates as part of this transaction. Any future rate increases would be related to prudent capital
investments or other increased expenses, and would need to be justified at that time.
a. Does this conclude your testimony?
A. Yes.
2 Bar Circle "S" Ranch, Inc. (the "Ranch") owns real property and easements on which some utility assets are
located.
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