DF 98-076
HANOVER WATER WORKS COMPANY
Petition to Issue Securities and Increase Rates
Order Approving Issuance of Securities and Increase in Rates
O R D E R N O. 23,007
September 1, 1998
APPEARANCES: McLane, Graf, Raulerson & Middleton by
Steven V. Camerino, Esq. and Sarah B. Knowlton, Esq. for Hanover
Water Works Company; Robert Frank, Esq. for the Staff of the New
Hampshire Public Utilities Commission.
I. PROCEDURAL HISTORY
On May 8, 1998, Hanover Water Works Company (Hanover)
filed with the New Hampshire Public Utilities Commission
(Commission) a petition, pursuant to RSA 369, requesting
authority to borrow money and to increase rates. Hanover
requested to borrow an amount up to $4,035,000 from the Drinking
Water State Revolving Fund (DWSRF) which is administered by the
New Hampshire Department of Environmental Services (NHDES). On
April 9, 1998, Hanover received preliminary approval from NHDES
to borrow said amount in order to finance three projects
recommended in an engineering study by the firm Dufresne-Henry,
Inc. to better provide adequate, safe and reliable service under
all conditions to the Town of Hanover, New Hampshire. Final
approval from NHDES is contingent in part upon Hanover receiving
authority from the Commission to borrow these funds and increase
its rates to service the debt.
An Order of Notice was issued on June 26, 1998 and a
public hearing was held on July 17, 1998. The Commission
received no requests for intervention.
II. STIPULATION
Hanover and the Staff of the Commission (Staff)
presented a Stipulation Agreement(Agreement or Stipulation)
providing authorization to issue securities in an amount up to
$4,035,000 in order to finance certain construction projects and
to increase rates by means of two step adjustments in order to
service this debt.
Peter Kulbacki, General Manager of Hanover, provided
testimony to describe the need for the proposed construction
projects. Mr. Kulbacki stated that in 1996, as a result of
increased water main breaks and associated service disruptions,
and in an effort to ensure continued compliance with an existing
Waiver of Filtration from NHDES, Hanover commissioned the
engineering firm Dufresne-Henry, Inc. to conduct an engineering
study to assess the viability of Hanover's water distribution
system and water storage facilities. In December 1997,
Dufresne-Henry, Inc. completed a study of Hanover's metering and
infrastructure. The study found a number of infrastructure
deficiencies that pose a threat of backflow and
cross-contamination to the drinking water supply. Mr. Kulbacki
explained that this threat exists because much of the
infrastructure is greater than 100 years old and consists of
unlined cast-iron pipe which is subject to corrosion and failure.
In addition, over 78% of the system has no post-treated storage.
Also, increased traffic on the roadways, under which much of the
distribution system is located, exerts additional pressure on
these already weak pipes. Mr. Kulbacki stated that the
engineering study made a number of recommendations to improve the
system.
Mr. Kulbacki said that in February 1998 Hanover applied
for financing from the DWSRF for the three recommended projects
with highest priority. Hanover received preliminary approval for
these projects from NHDES on April 9, 1998.
Mr. Kulbacki outlined the three projects originally
applied for as follows: 1) replace the water distribution main
located at East Wheelock Street at an estimated cost of
$1,290,000, with construction estimated to begin in the late fall
of 1998 or early spring of 1999 and ending in the summer of 1999;
2) construct water transmission and distribution mains on Crosby
and Lebanon Streets and an 800,000 gallon storage facility on the
south end of the main system at an estimated cost of $2,225,000;
and 3) replace a four inch water main on North College, Maple,
Prospect and West Streets at an estimated cost of $520,000. Mr.
Kulbacki anticipated that construction on these last two projects
would begin during the summer of 1999 with completion expected to
be during the late fall of 1999.
Mr. Kulbacki also outlined two additional projects not
contained in the original filing but which Hanover would be
requesting approval for under its current DWSRF funding proposal.
The first involves moving the Balch Hill pump station to a new
location near the Fletcher Reservoir as part of the East Wheelock
Street project. The second project involves replacement of the
source meter in conjunction with relocation of the current
chemical injection point, both also at Fletcher Reservoir. Mr.
Kulbacki indicated that the additional projects will not result
in any change to the total amount of funding requested.
Staff witness Jayson Laflamme presented the agreement
and outlined the components of the stipulation. Mr. Laflamme
indicated that in order to repay the issued securities, Hanover
would be allowed to increase its rates by means of two step
adjustments. The first would be in conjunction with the
completion of the East Wheelock Street main replacement and is
anticipated to be effective on or about June 1, 1999. Based upon
the estimated revenue requirement calculation, it is anticipated
that the first step adjustment would result in a 10.5% increase
in overall revenues. The second step adjustment is contemplated
to be effective on or about November 15, 1999 to coincide with
the completion of the construction of mains on Crosby and Lebanon
Streets and a storage facility on the south end of the main
system as well as a main replacement on North College, Maple,
Prospect and West Streets. It is estimated that this step
adjustment when added to the first step increase will result in a
22.02% increase in overall revenues. Mr. Laflamme said that
final approval of each step increase by means of a Commission
order will be contingent on review and approval of the costs
actually incurred for each project in order to confirm that such
costs are consistent with Hanover's petition in this case and
that all construction was prudently completed.
C. Bennett Brown, Jr. of Dayman, Lurie & Goldsbury,
P.C., which provides accounting services to Hanover, presented
testimony concerning the financial impact of the borrowing. Mr.
Brown stated that the terms and conditions of the DWSRF loans
would be based on the individualized needs of Hanover and would
be established based on the recommendations of the New Hampshire
Business Finance Authority (NHBFA). It is anticipated that the
terms of the loans will be over 20 years at an interest rate of
4.216% per annum for loans completed before October 1, 1998. The
interest rate will vary for those loan agreements entered into
after October 1, 1998. It is likely that NHDES will require
Hanover to provide security for these loans through the
assignment of water receipts.
Mr. Brown stated that under the proposed financing
arrangement, NHDES will make disbursements directly to
contractors engaged by Hanover in response to invoices submitted
by Hanover. NHDES will assess a flat 1% charge on all
disbursements made. In addition, interest will accrue on the
loan from the date of substantial completion of the project. All
accrued interest plus the initial 1% charge on disbursements will
be rolled into the principal amount of the loan for each project
when Hanover begins making payments on the loan. Mr. Brown said
that he estimated that the total interest to be paid over the
twenty year lives of the loans would be $1,786,214 assuming the
interest rate on the loans is 4.216%.
Mr. Brown stated that the financing will affect
Hanover's operating budget by increasing operating expenses by
$110,429, including depreciation of $82,850. Mr. Brown also
stated that interest expense will increase by $170,116.
Completion of the total financing contemplated will result in a
capitalization ratio of approximately 4.5 to 1.
Mr. Brown stated that Hanover will require a
substantial rate increase to service the debt. Due to the
disparity between the length of the loans and the depreciable
lives of the assets being put into service, Mr. Brown indicated
that Hanover will almost assuredly have to initiate a filing for
a full rate proceeding in the near future.
III. COMMISSION ANALYSIS
We have reviewed the issues presented by the
Stipulation between Hanover and Staff and believe that both the
terms of the proposed borrowing and the purpose for which it is
sought are consistent with the public good. The proposed step
increases are appropriate and will result in just and reasonable
rates assuming that the estimated costs are actually incurred and
that the aforementioned projects are constructed in a prudent
manner. Approval of the Stipulation will be with the
understanding that paragraph B3 of the Stipulation contemplates
further orders of the Commission requiring the review and audit
of construction costs and a showing of prudence prior to the
implementation of each step increase.
Based upon the foregoing, it is hereby
ORDERED, that, pursuant to RSA 369, Hanover is
authorized to borrow $4,035,000 at the rate of 4.216% under one
or more 20-year notes issued by the Drinking Water State
Revolving Fund administered by the New Hampshire Department of
Environmental Services. Such funds are to be used for the
purpose of curing certain deficiencies in Hanover's system which
were identified in a study by the engineering firm of
Dufresne-Henry, Inc.; and it is
FURTHER ORDERED, that Hanover is authorized to increase
its rates by means of two step adjustments with the understanding
that each step increase shall be contingent on review and
approval of the costs actually incurred for each project to
confirm that such costs are consistent with Hanover's petition in
this case and that all construction was prudently completed as
per Paragraph B3 of the Stipulation ; and it is
FURTHER ORDERED, that the petitioner shall file an
accounting with the Commission each January 1 and July 1, duly
sworn to by its Treasurer, showing the disposition of the
proceeds of this financing, until said proceeds are fully
expended.
By order of the Public Utilities Commission of New
Hampshire this first day of September, 1998.
Douglas L. Patch Bruce B. Ellsworth Susan S. Geiger
Chairman Commissioner Commissioner
Attested by:
Thomas B. Getz
Executive Director and Secretary