$20M Loan for Milford Water Co. Approved

The Milford Water Co. received approval Thursday to borrow up to $20 million to complete construction of the water treatment plant.

The state's Department of Public Utilities approved the loan, despite a request from the town of Milford for a smaller cap on the debt, of $18 million.

The approval allows , a private utility company, to enter into a loan agreement with People's United Bank. According to the approval order, the company is seeking a 10-year loan that would be interest-only for the first two years.

The plant is to be completed by April 30, 2013, and operating within the next month.

If the Water Co. returns to the state agency with a request for an increase in Water Company rates, paid by customers, which is expected, the DPU would have the authority to review all financial documents relating to construction of the water plant.

David Condrey, general manager of the Milford Water Co., could not be reached for immediate comment.

According to the approval order, the Water Co. solicited proposals for long-term borrowing from seven banks. "The Company states it selected People's United financing proposal as it provided the best terms available from a willing lender," the order states.

The construction contract between the company and the contractor "provides for the contractor to fund the construction costs" until the Water Co. secures the financing.

, which is majority-owned by the president of the Milford Water Co., according to the DPU.

Milford, represented by town counsel Gerald Moody, and that specifically the amounts budgeted for engineering fees and a $1.5 million contingency were inflated. "The town also argues that the record shows that the site work is essentially completed, and exceeded unit prices by only about $30,000," making a $1.5 million contingency excessive," the DPU order summarized.

The company, responding, said it had set aside an appropriate amoung for a large construction project and had taken "extraordinary efforts to ensure that there is no collusion or appearance of collusion between the company and the construction contractor."
The DPU order summarized: "Specifically, the company argues that it engaged in a competitive solicitation in which the chosen contractor supplied the lowest bid. Additionally, the company states that the president of both the company and the contractor has removed himself from any involvement or oversight of the interactions between the two, including any review of change orders."

In approving the Water Co.'s request, the state agency had to determine if it met two tests: whether the proposal was "reasonably necessary" to accomplish a legitimate purpose in meeting a service obligation; and whether the company met a "plant test." This final step requires a company to demonstrate that the fair market value of its land and plant exceeds long-term debt and outstanding stock.

In this case, the DPU found the Water Company demonstrated that $20 million is "reasonably necessary" to build the new water treatment plant.

The order stated: "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 [of Public Utilities] 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."

Regarding the "plant test," the DPU found the Water Company's "current plant investment is not suficient to support the issuance" of $20 million in long-term debt. "However, the company anticipates that once the water treatment plant is placed into service, it will have $37,560,463 in net plant, and thus satisfy the requirements."

In similar cases, the DPU has approved financing with certain conditions imposed on a company until the "net plant impairment" is corrected.

In this case, the record shows the company's debt-to-equity ratio will increase to 71 percent debt/29 percent equity (from 26 percent debt to 74 percent equity) as a result of the loan.

"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."

As a result, the order stipulates that "The Department intends to monitor the effects of the financing of the water treatment plant on the company's operations." Milford Water, if it accepts the financing, will have to provide to the department within 30 days: the total cost assumed by the company, the construction-work-in-progress balance; an updated net plant test calculation; and the company's most recent balance sheet and most recent profit and loss statement.