20190805Palfreyman Direct.pdf

Preston N. Carter (ISB No. 8462)
Charlie S. Baser (ISB No. 10884)
Givens Pursley LLP
601 W. Bannock St.
Boise, lD 83702
Telephone: [phone]
Facsimile: [phone]
prestoncarter@ givenspursley. com
charliebaser@ givenspursley. com
t 47 61s73 _t.DOC I l 3988. 1 ]
Attorneys for Falls Water Co., Inc,
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE
APPLICATION OF FALLS WATER
CO., INC. FOR APPROVAL OF
ACQUISITION OF THE ASSETS OF
THE WATER BUSINESS OF TAYLOR
MOUNTAIN WATER AND SEWER
DISTRICT
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ORIGINAL
DIRECT TESTIMONY OF JUSTIN PALFREYMAN
oN BEHALF OF FALLS WATER CO.,INC.
August 5,2019
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BACKGROUND
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a. Please state your name and title.
A. Justin Palfreyman, President of Falls Water Co., Inc. ("Falls Water"). I also serve as 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 to Lazard,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 Falls Water's proposed acquisition of the Water
Business assets of the Taylor Mountain Water and Sewer District ("District").
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1 Q. What do you mean by the term 66Water Business?"
2 A. The District owns and operates a water supply and distribution system. It also owns and
3 operates assets related to sewer (wastewater) services. In this testimony, I use the term "Water
s Business" to describe the District's water supply and distribution system, consistent with how the term
5 is defined in the Asset Purchase Agreement ("Agreement"), attached as Exhibit 1.1 My understanding
6 is that the Commission does not regulate sewer or wastewater systems or services, and therefore my
7 testimony addresses only the District's Water Business.
8 Q. Please describe NW Natural Water, and the relationship among Falls Water, NW Natural
9 Water of Idaho, and NW Natural Water.
1O A. NW Natural Water is a wholly owned subsidiary of NW Natural Holding Company ("NW
11 Natural Holdings"). NW Natural Holdings, which is headquartered in Portland, Oregon, is a publicly
t2 owned company with a market cap of approximately $1.8 billion. It has revolving credit facilities
13 aggregating to approximately $400 million. NW Natural Holdings' Form l0-K for 2018 filed with the
t4 Securities and Exchange Commission is attached as Exhibit 3.
15 NW Natural Water was created to own and operate water utilities, through subsidiaries, in
16 Oregon, Washington, and Idaho. NW Natural Water also has significant financial assets. It currently
ti owns and operates five water utilities, including Gem State Water Company, LLC (through NW
18 Natural Water of Idaho) in the area of Coeur d'Alene, Idaho, and Falls Water.
19 Falls Water is a wholly owned subsidiary of NW Natural Water. The Commission approved
20 NW Natural Water's acquisition of Falls Water in July 2018, in Order No. 34103, Case No. FLS-W-
rThe Asset Purchase Agreement was filed with the District Court for the Seventh Judicial District in redacted form. The
redacted Agreement is attached as Exhibit 1. An unredacted copy of the Agreement, attached as Exhibit 2, is being filed as
"Confidential" pursuant to the Commission's rules.
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1 l8-01. Falls Water will have access to the financial resources and the utility expertise to NW Natural
2 Water, NW Natural Holdings and their affiliates.
3 An organizational chan illustrating NW Natural Holdings' corporate structure is attached as
a Exhibit 4. The chart has been designated "Confidential" per Commission rules.
5 Q. Does NW Natural Water intend to undertake any changes to the corporate structure of
6 the relevant companies?
7 A. Yes. Falls Water currently is a subsidiary of NW Natural Water. NW Natural Water intends to
B make Falls Water a subsidiary of NW Natural Water of Idaho, which itself is a subsidiary of NW
9 Natural Water. Once this change occurs, Falls Water still will have access to the financial resources
10 and the utility expertise of NW Natural Water and NW Natural Holdings. This change will simply
11 place Falls Water under NW Natural Water of Idaho alongside NW Natural Water's other Idaho water
t2 utilities.
13 My understanding is that there is no legal requirement for the Commission to approve this
L4 reorganization, but NW Natural Water respectfully requests approval if required.
15 a. Please describe NW Natural Water's interest in, and recent acquisitions in, the water
76 sector.
11 A. In recent years, leadership of the NW Natural family of businesses undertook a comprehensive
1B strategic review process to identify and evaluate potential growth opportunities that, among other
1,9 criteria, would offer a risk profile consistent with our core utility business and a long-term opportunity
20 to grow beyond our existing business. The outcome of the strategic review process was a strategy and
2t plan to pursue opportunities in the water utility and infrastructure sector, in addition to the ongoing
22 focus on our 160 year old gas utility, storage and infrastructure business. We believe that a water
23 strategy is a compelling fit for NW Natural because it would build on our core competencies of
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1 constructing, operating and maintaining infrastructure, providing best-in-class customer service,
2 ensuring safety and reliability, and effectively managing a regulated utility.
3 NW Natural Water has been actively pursuing this strategy. NW Natural Water recently
a acquired, and is currently operating, five water companies through direct or indirect subsidiaries,
s including Falls Water. These companies include Gem State Water Company, LLC in Northern Idaho,
o which recently acquired the assets of Spirit Lake East Water Company and Lynnwood Water; Cascadia
7 Water,LLC, in Washington; Salmon Valley Water Company in Oregon; and Sunriver Water LLC in
B Oregon. By owning and operating these water utilities, NW Natural Water has gained valuable
9 experience in the water sector. NW Natural Water will bring this experience to the District's Water
1O Business customers.
11 a. Does NW Natural Water intend to make any changes to Falls Water employees as a result
t2 of its acquisition of the District's Water Business assets?
13 A. No. NW Natural Water currently intends to retain Falls Water's current employees, including
L4 Scott Bruce and Tony Wise. These employees will provide valuable local expertise to serve the
15 District's Water Business customers. The District does not have any employees, so Falls Water
L6 employees will assume the roles previously undertaken by volunteer members of the District's board
tl of directors ("Board"). The experience of expertise of Falls Water's employees will complement NW
18 Natural Water and its affiliates' financial resources and utility expertise.
19 THE TRANSACTION
20 a. Please describe the District.
27 A. The District is a special-purpose water and sewer district under Idaho law. The District
22 currently provides water service to approximately 158 residential customers and one commercial
23 customer in what is commonly known as the Idaho Falls Country Club in Bonneville County, Idaho.
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1 The area currently served by the District is approximately ten miles from Falls Water's service
territory.
My understanding is that the District was created in2014 to take over a system that was
previously owned and operated by a regulated public utility, Country Club Hills Utilities, Inc.
("Country Club Hills Utilities"). The Commission allowed Country Club Hills Utilities to relinquish its
Certificate of Public Necessary and Convenience ("CPCN") and transfer its assets to the District in
2015. Since its inception, the District has been run by an all-volunteer Board. I understand that the
Board has resolved many of the problems that Country Club Hills Utilities experienced, but that
members of the Board do not see their volunteer positions as a viable long-term solution for the
District's customers.
a. Why is NW Natural Water and Falls Water interested in acquiring the District's Water
Business assets?
A. Acquiring these assets fits squarely into NW Natural Water's continued growth in the water
sector. NW Natural Water and Falls Water believe that the District's Water Business, and Water
Business assets, are well-run and well-maintained. However, like many water utilities, the water
system is in need of capital investment to support system growth and maintain system integrity
(preliminarily, Falls Water has noted possible well site improvements but has not definitively
identified any specific capital expenditures/improvements at this time). In addition, while the volunteer
Board has done an admirable job with the Water Business, NW Natural Water and Falls Water will
provide the professional expertise needed to provide high-quality water services to customers in the
long term. The District's proximity to Falls Water's service territory means that Falls Water's
employees can provide a local presence and seamless transition to the District's customers. In addition,
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r if the transaction is approved, water service to the District's customers will be overseen by the
2 Commission.
3 Q. Please describe the proposed transaction to acquire the District's Water Business assets.
4 A. On June 28,2}lg,the District and the buying parties entered into the Agreement.2 Under the
5 Agreement, if approved by the Commission, Falls Water will acquire the Water Business assets of the
6 District. The District is currently not regulated by the Commission; if approved, the Commission will
7 assume regulatory authority as to rates, service, and other aspects of the Water Business.
8 The District does not have any employees. Employees of Falls Water, including Mr. Bruce and
9 Mr. Wise, will operate the District's water system if the Transaction is approved. Mr. Wise will serve
10 as the licensed water system operator for the District's Water Business assets if the transaction is
11 approved. Mr. Wise holds license number DWD3-21515 (Class 3), and his business address is 2180 N
L2 Deborah Drive,Idaho Falls,ID 83401.
13 a. Please describe the process the District engaged in to obtain input on, and approval of the
l4 Agreement.
15 A. The District is a special-purpose district organized under Idaho law. I understand that the
t6 District followed statutory processes to obtain input on the Agreement. The process is described in the
ti Verified Petition for Dissolution of Taylor Mountain Water and Sewer District and Approval of
1B Transfer of Assets ("Verified Petition"), attached to the Application. To summarize, NW Natural
t9 Water approached the District and began preliminary discussions in Fall 2018. The parties entered into
20 a Non-Binding Letter of Intent to Purchase the Assets of Taylor Mountain Water and Sewer District's
2L Water and Wastewater Businesses (effective January 14,2019). Afterwards, the District held a public
2 The buying parties are Falls Water, as to the Water Business assets, and Gem State Infrastructure, LLC as to the
wastewater assets. My testimony discusses the Water Business assets, as they are subject to the Commission's jurisdiction.
A partially executed version of the Agreement was filed with the District Court before the June 26,2079 hearing on the
District's petition for dissolution.
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meeting for its members, during which the Board discussed the possible acquisition by NW Natural
Water and Falls Water. The District provided its members a form to petition for an election. An
election on the asset transfer would have been held if at least l0% of the members signed the petition.
No such petition was filed with the District. Accordingly, the District filed the Verified Petition with
the District Court of the Seventh Judicial District. The parties continued discussions, which ultimately
lead to the Agreement. I understand that the District held a second meeting with its members on June
8,2019, during which the District provided notice of the June26,2019 hearing date on the Verified
Petition.
a. Did the District Court approve the Verified Petition?
A. Yes. A hearing on the Verified Petition was held on June 26,2019.1 understand that
representatives of the District and Falls Water attended to explain the proposed transaction and
dissolution with the Court. A copy of the Agreement (with appropriate redactions) was filed before the
hearing. On July 7,2019, the District Court entered an Order, attached to the Application, under which
the Court will dissolve the District upon notice by both parties that the conditions of the Agreement
have been met.
a. Does Falls Water seek to change rates through this transaction?
A. No. Falls Water and NW Natural Water are not seeking to change rates, rate structure, or other
charges for the District's customers or for Falls Water customers through this transaction. Falls Water
and NW Natural Water propose that the current rate structure, rates, and other charges remain the same
for each customer group. I understand that Idaho law authorizes the Commission to provide for
acquisition adjustments in certain circumstances for entities acquiring water utilities in the State, but
Falls Water does not seek an acquisition adjustment with this particular transaction, and Falls Water
will not seek any increase to rates as part of this transaction. Any future rate increases would be related
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1 to prudent capital investments or other increased expenses, and would need to be justified at that time.
2 Transaction-related costs have been incurred by NW Natural Holdings, not by Falls Water. The costs
3 will not be passed to Falls Water and will not be included in any rate case filing. Transaction-related
4 costs include activities related to due diligence, environmental consultants, legal costs, travel costs, and
5 other costs related to negotiations.
6 A summary of the rates and charges currently charged to the District's customers is attached as
z Exhibit 5, in the form of proposed tariffs. My understanding is that the District arrived at its rates and
B costs by comparison with other similar utilities, not on the basis of cost, and that the rates and charges
9 were adopted by the Board pursuant to the procedures set forth by Idaho law.
1O If the Commission approves the Transaction, Falls Water will work with Commission Staff to
11 file updated tariffs reflecting the approved rates and charges. If the Commission approves the
t2 Transaction, Falls Water will also work with Commission Staff before and during future rate
13 proceedings to consider consolidation ofrates, rate structure, and other charges as reasonable and
l4 appropriate for current Falls Water and current District customers.
15 a. Does Falls Water request any other action from the Commission?
t6 A. Yes. Falls Water currently holds CPCN No. 236. The District does not have a CPCN. Falls
Li Water requests that its CPCN be amended to include the territory currently served by the District. This
1B will enable Falls Water to provide service to the District's current customers. A map showing the
L9 proposed additional service territory is attached as Exhibit 6.
20 a. Does NW Natural Water have additional information for the Commission?
2t A. Yes. Through its recent acquisitions, and through its interactions with Commission Staff, NW
22 Natural Water has identified additional information that may prove useful to the Commission in
23 evaluating the proposed transaction. A map of the District's Water Business system is attached as
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r ExhibitT. A list of the District's Water Business assets, with the information known at this time, is
2 attached as Exhibit 8. If the transaction is approved, NW Natural Water and Falls Water intend to
3 complete a water master planning process for the Water Business system; the Companies anticipate
e obtaining additional information regarding the system and associated assets through this process.
5 Excel workbooks that summarize information regarding the Water Business system's capacity
e and water rights are attached as Exhibit 9, and excel workbooks that contain billing and usage data for
7 the District's current customers are attached as Exhibit 10. Well logs for the wells used by the
8 District's Water Business system are attached as Exhibit 1 1.
9 Meters are currently read on a monthly basis from April through October, and customers are
10 currently billed on a monthly basis throughout the year. Falls Water intends to maintain this schedule
11 for the foreseeable future.
12 Falls Water provides 24-how response to repairs or water quality issues. Customer can call the
13 Falls Water office phone number, [phone], and the call will be forwarded to an answering
t4 service if the line cannot be answered.
15 If the Transaction is approved, accounting, financial, and customer records will be kept in the
t6 local office of Falls Water, 2180 N Deborah Drive, Idaho Falls,ID 83401. Falls Water's local office
11 also will be the location for former District customers to pay bills, make requests, and otherwise
18 correspond with Falls Water.
t9 The District's customers received notice of the proposed acquisition through the dissolution
20 process discussed above. Falls Water also intends to publish a notice to customers in the local
27 newspaper, although I understand that notice is not required.
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1 While Falls Water has not identified any particular growth opportunities for the District,
z undeveloped lots currently exist in the vicinity. If these lots are developed, new customers can be
: added to the system.
4 The District currently provides fire prevention. Richard Fowler is the District Operations
s Officer of the Bonneville County Fire Protection District #1.
6 Q. Does this conclude your testimony?
1 A. Yes.
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