20180221Palfreyman Direct.pdf

Michael C. Creamer (ISB No. 4030)
Preston N. Carter (ISB No. 8462)
Givens Pursley LLP
601 W. Bannock St.
Boise,ID 83702
Telephone: [phone]
Facsimile: [phone]
mcc@ givenspursley.com
prestoncarter@ qivenspursley. com
1409002'7 2.docx [ 3988.1]
Attorneys for NW Natural
IN THE MATTER OF THE
APPLICATION FOR APPROVAL OF
ACQUISITION OF FALLS WATER
COMPANY BY NW NATURAL
WATER COMPANY,LLC
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
RECEIVED
201$ f[B 2l Pt{ tr: 5 |
,',, J,I'H L*rfi1ffi l8*, o*
caseNo. FtS -N- l8-ot
DIRECT TESTIMONY OF JUSTIN PALFREYMAN
ON BEHALF OF NW NATURAL
FEBRUARY 21,2018
ORIGINAL
I BACKGROUND
2 Q. Please state your name and title.
3 A. Justin Palfreyman, Vice President of Strategy and Business Development for NW Natural
4 Gas Company ("NW Natural" or "Company").
5 Q. Please summarize your professional experience and educational background.
6 A. I have worked for 15 years in strategy, finance and corporate development functions. I
7 most recently worked as a Director inLazard' s Power, Energy and Infrastructure Group in New
8 York, where I provided strategic and financial advice to corporations, institutional investors,
9 private equity funds and government clients. My advisory assignments related to general
10 strategic advice; mergers, acquisitions and divestitures; raising capital; restructurings; corporate
I I preparedness/takeover defense; and capital structure optimization. Prior toLazard,I worked in
12 the lnfrastructure Investment Banking Group at Goldman Sachs in New York. I also previously
13 held various positions in finance, strategy and business development at both Apex Learning and
14 Accenture in Seattle, Washington.
l5 I hold an MBA from the University of Chicago Booth School of Business, a Master's of
l6 Public Policy from The University of Chicago Irving B. Harris School of Public Policy and a
17 Bachelor's of Business Administration from Pacific Lutheran University.
18 a. What is the purpose of your testimony?
19 A. My testimony is offered to provide the Commission and Commission Staff with
20 information regarding NW Natural and NW Natural Water Company, LLC's ("NW Natural
21 Water") merger with Falls Water Company ("Falls Water") and related issues, including NW
22 Natural's growth strategy into the water industry and the Company's upcoming corporate
23 reorganization to form a holding company structure.
I
PeLnRrYrvleN, DI
NW NATURAL
I Q. Please describe NW Natural.
2 A. NW Natural is a publicly-held company headquartered in Portland, Oregon, engaged in
3 gas distribution and gas storage operations. NW Natural and its predecessors have supplied gas
4 service to the public since 1859. Today, the Company serves over 730,000 homes and
5 businesses in Oregon and Washington. Approximately eighty-nine percent of its gas utility
6 customers reside in Oregon and approximately eleven percent of its utility customers reside in
7 Washington. NW Natural also operates a gas storage business, which provides gas storage
8 services for customers in Oregon and California. NW Natural's most recent l0-K statement is
9 attached as Exhibit l.
l0 a. Please explain why NW Natural is entering the water industry sector.
I I A. NW Natural has continuously looked at growth opporrunities throughout its 159-year
12 history. In recent years, we undertook a comprehensive sffategic review process to identify and
l3 evaluate potential growth opportunities that, among other criteria, would offer a risk profile
14 consistent with our core utility business and a long-term opportunity to grow beyond our existing
l5 business. The outcome of the strategic review process was a strategy and plan to pursue
l6 opportunities in the water utility and infrastructure sector, in addition to the Company's ongoing
17 focus on its gas utility, storage and infrastructure business. We believe that a water strategy is a
l8 compelling fit for NW Natural because it would build on the Company's core competencies of
19 constructing, operating and maintaining infrastructure, providing best-in-class customer service,
20 ensuring safety and reliability, and effectively managing a regulated utility.
2l Water infrastructure in the United States is generally old and suffering from substantial
22 deferred maintenance, providing a compelling long-term investment opporlunity for NW Natural
23 that can benefit utility consumers. Water utilities are facing the need for substantial capital
2
PeLnRrYueN, Dl
NWNerunel
I investment to maintain their systems, enhance service quality, and support future population
2 growth. Given the highly fragmented nature of the water sector (e.g., there are over 50,000
3 water utilities in the U.S.), in many cases, these utilities do not have the resources or expertise to
4 invest in and execute on the upgrades and expansions required. NW Natural sees an opportunity
5 to add value with respect to the management, design, and operation of water distribution assets to
6 achieve significant economies ofscale through integrated planning processes, shared services,
7 technology investments, and billing systems. NW Natural understands the role of the
8 Commission in ensuring that these investments and activities are to the benefit of customers, and
9 required to prudently operate the system. NW Natural shares this mindset, and already operates
l0 in an environment where this regulatory construct applies.
I I a. Does NW Natural's strategy represent a near-term or long-term strategy?
12 A. It is a long-term strategy, as we believe it will take time to acquire, manage, and develop
13 a meaningful water utility business.
14 THE PROPOSED ACOUISITION OF FALLS WATER
15 a. Please describe Falls Water.
16 A. Falls Water is a privately-owned, rate-regulated water utility located in eastern Idaho,
17 providing water service to approximately 5,500 customers in Bonneville County. Falls Water
18 holds Certificate of Public Convenience and Necessity ("CPCN") No. 236, as amended and
19 approved by the Commission on August 13,2015. Falls Water was formed to serve regional
20 development in Bonneville County. Currently, Falls Water's sole shareholder is Brent Johnson,
21 who also serves as the President.
22 a. Please describe NW Natural's interest in Falls Water.
23 Acquiring Falls Water fits squarely into NW Natural's growth strategy discussed above.
3
PALFREYMAN, DI
NWNeruReI-
I We believe Falls Water is a well-run and well-maintained water distribution system. But like
2 many water utilities, Falls Water is in need of capital investrnent to support system growth and
3 maintain system integrity. NW Natural has the financial strength to support these needs.
4 Additionally, NW Natural believes that Falls Water will provide a platform in Idaho for further
5 expansion in the water sector.
6 Q. Please describe the proposed transaction to acquire Falls Water.
7 A. On December 20,2017, NW Natural, NW Natural Water, and Falls Water Merger
8 Sub lnc. ("Merger Sub") entered into an Agreement and Plan of Merger ("Agreement") with
9 Falls Water to acquire 100 percent of Falls Water's stock, included as Exhibit 2 to this
10 Application. The consideration for the acquisition is identified in the Agreement, attached
I I hereto, or all of the issued and outstanding stock of Falls Water.l Immediately prior to
12 consummation of the acquisition, NW Natural will make an equity contribution derived from
l3 retained eamings to NWN Water LLC, which cash NWN Water LLC will use to purchase NW
14 Natural stock on the open market at the then-current fair market value. NWN Water LLC will
l5 then transfer those shares to Falls Water's shareholders, in exchange for all issued and
16 outstanding Falls Water stock.
17 The acquisition is structured as a reverse triangular merger with Merger Sub merging
l8 with and into Falls Water, which will be the surviving corporation. After the acquisition closes,2
19 Falls Water will continue to exist in its current form as a subsidiary of NWN Water LLC, and
20 Falls Water's president, Brent Johnson, will continue on in his current role for a period of one
2l year. Additionally, Falls Water's existing employees and independent contractors will continue
I I understand that the consideration is confidential and the Agreement has been or will be filed in accordance with
the Commission's rules for confidentiality.
2 Per the Agreement, obtaining regulatory approvals for the acquisition is a condition of closing.
4
PeLnngvuRN, Dt
NW Nerunel
2
to work for the water utility and provide service to customers. Thus, from the perspective of
Falls Water's customers, the transition to NW Natural's ownership will be seamless.
a. Are you seeking to increase rates for Falls Water's customers as a result of the
acquisition?
A. No, we are not. We understand that Idaho law authorizes the IPUC to provide for
acquisition adjustments in certain circumstances for entities acquiring water utilities in the state,
but we will not be seeking an acquisition adjustment with this particular transaction, and we will
not be seeking any increases 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. You mentioned that Falls Water is in need of capital investments. Please describe
your plans for making improvements to the Falls Water system.
A. As with any utility, investment in plant is needed to ensure the provision of safe and reliable
service. We do intend to make improvements to the Falls Water system as those investments are
needed. These improvements include completing the well previously approved by the
Commission, installing an additional well or wells as needed, constructing storage facilities as
needed, and other improvements designed to meet system needs and ensure safety and reliability.
a. Are you seeking approval of these improvements in this filing?
A. No, we are not seeking approval for any capital improvements with this filing. As projects
are completed and put in-service, we will seek a prudence review to authorize cost recovery
through ordinary ratemaking processes at the Commission. We look forward to working
collaboratively with the Commission and Commission Staff regarding the details and timing of
these capital improvements.
NW NATURAL'S PROPOSED REORGANIZATION
Does NW Natural contemplate any other changes to its business in the near-term?
NW Natural is in the process of forming a holding company. The purpose of this
5
PALFREYMAN, DI
NW Narunel
J
4
5
6
7
8
9
10
11
t2
l3
t4
l5
l6
t7
18
t9
20
2t
22
23
24
25
26
a.
A.
I reorganization is simply to provide a more optimal business structure within which NW Natural
2 can seek to grow its business, including its acquisition of Falls Water.
3 Q. Please describe NW Natural's proposed reorganization.
4 A. NW Natural intends to undergo areorganization that, when completed, will result in a
5 holding company structure, where NW Natural's gas business is owned by a holding company,
6 and would be a "sister company" to other companies owned by the holding company, including
7 Falls Water. We believe that the holding company structure is well-suited for our Company's
8 needs as it provides a better platform for growth for the consolidated organization and enhances
9 corporate separation between affiliated entities.
10 Under the new corporate structure, the holding company will be a non-operating parent
I I company for NW Natural, NW Natural Water, and other affiliated entities. NW Natural's
12 current subsidiaries will move from under NW Natural to become subsidiaries of the holding
13 company.3 As such, NW Natural Water and its wholly-owned subsidiary Falls Water will
14 become subsidiaries of the holding company. The reorganization will have no impact on the
l5 dayto-day operations of Falls Water. A chart illustrating the proposed reorganization is
16 included as Exhibit 3.
17 a. What is the current status of the proposed reorganization?
18 A. In order for the reorganization to take place, NW Natural was required to seek approval
19 from the utility commissions that regulate NW Natural and its regulated subsidiaries. On
20 February 10,2017, NW Natural frled applications seeking approval to reorganize to form a
2l holding company structure with the Oregon Public Utility Commission ("OPUC") and the
3 Two NW Natural subsidiaries (NW Natural Energy Corp. and NW Natural Gas Reserves, LLC) will remain
subsidiaries of NW Natural as those entities hold utility assets relating to an Oregon Public Utility Commission
approved gas reserves transaction.
6
PaLFnEYUAN, DI
NWNeruner-
2
3
4
5
6
7
8
9
l0
ll
t2
l3
l4
l5
l6
t7
r8
19
20
2t
22
23
Washington Utilities and Transportation Commission ("WUTC"). Additionally, NW Natural
and three of its downstream entities filed for approval of the reorganization with the California
Public Utilities Commission ("CPUC"), which regulates NW Natural's Califomia natural gas
storage business, Gill Ranch Storage, LLC. The OPUC and WUTC have approved the
proposed reorganization. A settlement agreement has been filed with the CPUC and is pending
approval.
Additionally, our shareholders will vote to approve the transaction at the Company's
annual shareholder meeting on May 24,2018, If approved by our shareholders, NW Natural's
Board of Directors will provide a final vote to trigger the reorganization. Our target date to make
the appropriate corporate filings to implement the transaction is July 1,2018.
a. Will the proposed reorgantzation impact Falls Water or its customers?
A. No. The proposed reorganization will occur two levels upstream of Falls Water, which
will continue to exist in its current form before and after the reorganization. The reorganization
will not affect the rates or services provided to Falls Water customers.
0. Is NW Natural seeking approval of reorganization in this filing?
A. To the extent that the Commission deems it necessary to approve the change in upstream
ownership of Falls Water as a result of the reorganization, we would ask that the Commission
approve the subsequent reorganization as part of its approval of the acquisition of Falls Water.
a. Does this conclude your testimony?
A. Yes.
7
PALFREYMAN, DI
NWNATURAL