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DPU Approves $20 Million Loan for Water Treatment Plant

By Kevin Rudden Staff Reporter/Columnist · July 13, 2012

The water treatment plant is under construction on the Milford Water Company's Dilla St. campus.



The state Department of Public Utilities (DPU) last month approved the Milford Water Company's request to borrow up to $20 million to finance the construction of the new water treatment plant currently being built at its Dilla St. campus. Manager David Condrey said the utility expects to file a rate increase request with the DPU in September to generate revenue to pay off the long-term debt.

The DPU's ruling acknowledged that the rate hike is needed: "An analysis of Milford Water's financial requirements, prepared by an outside consulting firm, indicates that a significant increase in revenues will be needed in 2013 to ensure sufficient cash flow to provide for debt service and to maintain sufficient interest coverage."

Taking on the up to $20 million in borrowing also, in essence, means the water company will have more debt than equity until the borrowing is paid off, both Condrey and the DPU's ruling said. The company now has a capital structure ratio of 71.23 percent common equity that will fall to 27.57 percent – a drop of 61.3 percent – while its long-term debt will increase from 25.95 percent to 71.34 percent – a 174.9 percent increase.

The DPU's ruling stated that "As a result of this substantial shift in the Company's debt-to-equity ratio and the potential for the Company to experience financial strain in the absence of increased revenues, the Department intends to monitor the effects of the financing of the water treatment plant on the Company's operations." The state regulatory agency said that the water company must supply it with various financial documents within 30 days of taking out the construction loan. Condrey said the company will comply with this requirement.

The water company filed its loan approval request with the DPU on March 23, the Town of Milford intervened on April 17, and the DPU issued its 21-page approval on June 14. The DPU rejected a request by the Town of Milford to cap the borrowing at $18 million.

"The Town asserts that because the Company and the construction contractor are both majority-owned and controlled by the same family, there will be no incentive to economize or borrow less than the $20,000,000. Specifically, the Town challenges the Company's budgeted amount of $1,500,000 for engineering oversight and $1,500,000 for contingencies and unforeseen additional costs," according to the DPU's ruling.

The ruling stated: "The Department finds no evidence to indicate that collusion or unfair dealings are likely to take place between the Company and the construction contractor if the full amount requested is approved. The record shows that the Company has taken steps to ensure that the transaction is at arm's length. Specifically, the Company engaged in a competitive solicitation for which the chosen contractor was the lowest bidder, and acted to remove the current president of Milford Water and the construction contractor from oversight duties related to the water treatment plant project. We need not make a finding here whether the transaction is indeed fair and at arm's length, but we see nothing to indicate that an approval of a debt issuance of up to $20,000,000 would result in unfair dealings at ratepayer expense, and we will not reduce the amount requested on that ground. Further, a construction contingency of $1,500,000 (or roughly ten percent of construction costs) is not an unusual term in a construction contract of this type. As for the $1,500,000 budgeted for engineering oversight, the existence of a not-to-exceed contract does not necessarily mean that future contracts or amendments will not be necessary. The $1,500,000 figures challenged by the town are simply budget items that may or may not be spent depending on the circumstances, and there is nothing to indicate that the Company's management decisions in coming to its overall budget are questionable. Milford Water has demonstrated that an amount up to $20,000,000 is reasonably necessary to accomplish the legitimate utility purpose of constructing a water treatment facility. Further, since the amount requested in this case can be used only for construction of the water treatment facility, there is no reason to conclude that any of the Loan proceeds would be used for improper purposes. Additionally, the Department will have the opportunity to review the prudency of all expenditures incurred in construction of the water treatment facility should the Company seek to collect those costs from ratepayers in a future proceeding... If, at that time, the Department determines that the Company imprudently spent any of the Loan proceeds, the Department will not allow the Company to recover those funds through rates."

Condrey noted that construction of the new water treatment plant was about four to five weeks ahead of schedule as of the last week in June.