Price on Apple Valley water takeover approaching $150M (March 11, 2017)

The effort by the Town of Apple Valley to acquire the water system serving that desert community has grown more complicated – and expensive – as the owner of the water-producing and delivering asset has initiated the investment of what is likely to be millions of dollars to upgrade another water system in the Mojave Desert located some 36 miles distant.

If the town is to indeed acquire the water system serving its businesses and 69,135 residents from the company that now owns and controls it, Liberty Utilities, it will almost assuredly have to purchase the Yermo Water Company along with it. In addition to being at best marginally profitable to Liberty, the Yermo system is in sore need of renovation, which in today’s dollars will cost at least $6 million and possibly more than $7 million. The addition of those costs to the price Liberty and its corporate affiliate, Algonquin Power, below which the controlling entity would be unwilling to go in departing with the Apple Valley Ranchos Water Company would very likely push Apple Valley’s out the door costs for taking control of its water utility to at least as high as $109 million before interest and perhaps as much $163 million before interest.

The Apple Valley Ranchos Water Company was created in 1945 by Newt Bass and B.J. Westlund as an adjunct to their effort to develop the town on the 6,500 acres they had acquired from the Southern Pacific Railroad. Shortly after the town incorporated in 1988 the water system’s then-owner, the Wheeler Family, offered to sell it – 18 medium and deep wells, pipes, reservoirs, pumping units and appurtenances – to Town Hall for $2.5 million. The town spurned that offer.

In 2011, the Carlisle Group, an American multinational private equity and asset management corporation, acquired from the Wheeler Family at a cost of $102.2 million the Park Water Company, which in addition to its water holdings in Apple Valley included the water system serving Compton, Downey and Bellflower in Los Angeles County, as well as the Mountain Water Company, which serves Missoula, Montana.

When the Carlisle Group purchased Park Water, the town of Apple Valley impaneled a so-called blue ribbon committee to consider acquiring Apple Valley Ranchos. Again, however, the town failed to bite the bullet and buy the water system when the committee advised against the acquisition.

The Carlisle Group packaged the water companies serving Missoula, Bellflower, Compton, Downey, Missoula, and Apple Valley together as what it called Western Water Holdings and put them on the market, at the same time embarking on upgrades to the various systems to make them more attractive to potential buyers. Those upgrades also boosted the price the Carlisle Group was asking.

The prevailing sentiment in Apple Valley with regard to the town getting control of its own water utility abruptly changed less than three years after the blue ribbon committee weighed in against purchasing the water company. Park, now under the control of the Carlisle Group, after beginning to implement in 2012 rate increases on Apple Valley Ranchos customers totaling 19 percent and then completing $8.1 million in capital improvements to the Apple Valley Ranchos Water Company in 2014, instituted another 30 percent rate hike on Apple Valley Ranchos customers to be implemented from 2015 until 2017. In 2014, town officials began trading notes with Missoula city officials, where Park Water’s Mountain Water Company had likewise escalated rates. In Montana, Missoula officials initiated what in time would prove to be a successful effort to wrest control of the water utility from its private owner by means of an eminent domain proceeding.

In 2013, Town of Apple Valley officials, alarmed at the prospect that the water company serving the community’s 69,135 residents and its businesses was about to be purchased by a Canadian company, Algonquin Power/Liberty Utilities, challenged the proposed sale by means of a complaint to the California Public Utilities Commission. While the California Public Utilities Commission decision was pending, in the summer of 2015, the Carlisle Group had arranged for Apple Valley Ranchos to acquire, for $300,000, the water system which serves some 900 residents in the desert community of Yermo, which lies roughly 36 miles from Apple Valley.

For decades, the Yermo Water Company had been owned by Donald Walker, who had acquired it because he saw it as a profit-generating entity, one that could be maintained with very little devotion to maintenance or upgrades. By the late 1990s the company’s pipes and pumping systems were falling into a state of disrepair, a situation that was exacerbated in the early 2000s when Walker relocated to Florida, leaving the neglected and undercapitalized company in the hands of a caretaker resident of the area with no expertise or real understanding of how to run a water company. Without a licensed operator to look after and operate the system, the circumstance worsened. During the summer of 2006, the primary water tank serving the Yermo community’s water system developed a leak and customers were without water for a week in the small community near Barstow, where temperatures exceeded 100 degrees every day. The California Department of Health and the California Public Utilities Commission initiated an investigation into the matter in 2007 and a decision to pursue the appointment of a receiver was issued in May of 2009. A delay ensued when a community-based prospective buyer surfaced and, after more than two years of negotiations, the sale fell through. With Walker in arrears on taxes and fines imposed by the California Department of Health, the California Public Utilities Commission filed to take control of the water company in August 2012. Three months later, the Superior Court entrusted operation of the Yermo Water Company to the Yermo Community Services District and appointed California Public Utilities Commission Attorney John Richardson to act as receiver. The Yermo Community Services District then made $40,000 in emergency renovations to the system to keep it functioning, even as the receivership arrangement was contested by Walker’s family. A welter of claims filed by Walker’s wife, Charlene, were ultimately denied by the Superior Court on March 6, 2013.

In July 2013 Apple Valley Ranchos, acting on behalf of Park Water Company, bid $300,000 on the purchase of the Yermo Water Company. Subsequently, Bob Smith, president of the Yermo Community Services District, acquiesced in Richardson’s decision to accept Apple Valley Ranchos’ offer.

Over the Town of Apple Valley’s protest, the Public Utilities Commission in February 2015 approved the sale to Apple Valley Ranchos.

In December 2015, the California Public Utilities Commission conditionally approved the sale of the Apple Valley Ranchos component of Western Water Holdings LLC to Liberty Utilities, which represented roughly a third of Liberty/Algonquin’s acquisition of Park Water Co. Liberty/Algonquin assumed some $77 million of Park’s existing debt as part of the purchase agreement for all of Park’s California and Montana holdings. Liberty/Algonquin paid $327 million for all three components of Western Water – the Missoula operation, the Bellflower-Compton-Downey operation and the Apple Valley operation.

In January 2016, Liberty Utilities, an American subsidiary of Canadian-owned Algonquin Power and Utility Corporation, finalized its acquisition of Apple Valley Ranchos by consummating the purchase of Park Water Company from the Carlyle Group.

Meanwhile, the city of Missoula had utilized its power of eminent domain to condemn and seek to acquire Mountain Water Company from Park Water Company. Mountain Water fought the takeover, but the matter went to trial before Judge Karen Townsend in April 2015, resulting in Townsend on June 15, 2015, entering a judgment in favor of Missoula. Park contested that ruling with the Montana Supreme Court, during which time Park made the sale of all of its assets to Algonquin/Liberty.

In August 2016 the Montana Supreme Court ruled 5-2 in favor of the City of Missoula’s eminent domain purchase of Mountain Water Co.’s water system, with the majority opinion holding that municipal ownership of the water system was more necessary than it remaining under the control of Park (which by that point had been succeeded by Algonquin/Liberty), a for-profit enterprise.

To effectuate the forced purchase, Missoula had to put up $88.6 million, which was deemed the fair market value of Mountain Water Company.

Even before Missoula prevailed in that case, town of Apple Valley officials began angling to take Apple Valley Ranchos away from Park Water Company. As articulated by the town, it believes it will be able to purchase Apple Valley Ranchos through a financing strategy involving issuing bonds and that it will be able to service the bonded indebtedness and carry out improvements to the water system by means of the payments made to the town by water users/customers, i.e., the town’s residents. The town’s officials maintain that the revenue from the water sales will be dedicated solely to this bonded debt service and water division operations and maintenance. The town further maintains this can be effectuated without any water rate increases.

That scenario, however, was highly dependent upon Park Water’s willingness to sell the Apple Valley Ranchos Water Company’s full assets for a price of the town’s choosing, i.e., around $50 million. In support of that, the town obtained from what it referred to as an independent appraisal firm the rather wishful fair purchase price of $45.54 million.

Park Water and later Liberty corporate officials scoffed at that idea. Indeed, a simple mathematical analysis would indicate the actual selling price would be no less than twice that. Assuming Apple Valley Ranchos represented roughly one third of the entirety of Western Water’s assets at the time of Algonquin/Liberty’s $327 million purchase, a more realistic number would be that Apple Valley Ranchos would cost $109 million in 2016 dollars. Another simple analysis would derive a higher number. Subtracting the $88.6 million fair market value for Mountain Water upheld by the Missouri Supreme Court from the $327 million purchase price for Western Water would indicate that the Bellflower-Compton-Downey and the Apple Valley components of Western Water are worth $238.4 million. Assuming Apple Valley Ranchos represents roughly one half of the remaining Western Water assets now in the possession of Algonquin/Liberty, its fair market value would be approximately $119 million.

Another price metric would take into consideration that in Montana, local water commissioners in June 2015 set the fair market price of the Mountain Water Company, which owned and operated 37 mostly shallow and medium-depth wells, at $88.6 million. Missoula, with 69,821 residents, is comparable in population size to Apple Valley, which numbers roughly 71,000 at present.

In Los Angeles County, Algonquin/Liberty supplies between five and six percent of 96,455-population Compton’s water by means of the four wells it operates there, while purchasing somewhere between 92 and 94 percent of the water delivered to Compton from the Central Basin Municipal Water District which wholesales potable water from the Metropolitan Water District of Southern California. In 76,616-population Bellflower and 113,242-population Downey, Algonquin/Liberty supplies about 15 percent of the supply to those two cities with water drawn from the groundwater basin through its eight wells there, while purchasing roughly 81 percent through the Central Basin Municipal Water District.

In addition, the Golden State Water Company also serves the communities of Compton, Downey, and Bellflower.

By contrast, the Apple Valley Ranchos Water company operates 24 deep wells throughout Apple Valley and three wells in Yermo.

Though there are other methods of calculating the value of a water purveying operation than the sheer number of its wells, in using that yardstick, it appears that Apple Valley Ranchos’ 24-well operation in Apple Valley entailed one third of Algonquin’s original Western Water Holdings’ 72-well inventory of water-producing assets. Apple Valley Ranchos now accounts for 24 of Algonquin/Liberty’s 35 California Wells, translating into 68.57 percent of its California wells, which are collectively valued at $238.4 million. With Algonquin having paid $327 million for Western Water Holdings, it stands to reason any judge hearing the eminent domain case will accept, unless the Town of Apple Valley can present compelling evidence to support a conclusion otherwise, that Apple Valley Ranchos is valued at somewhere between $109 million on the low end, and $163.47 million on the high end.

Within the last fortnight, Algonquin/Liberty gave notice that it had completed the first phase of improvements and upgrades to the long-neglected Yermo water system, entailing a cost of somewhere in the neighborhood of $732,000, and that it is committed to carrying out $5.8 million more in system upgrades over the next two to three years. The improvements carried out so far consist of installing new or upgrading over 4,600 feet of pipeline, a chlorination plant and putting in two generators. The company has also capped unproductive or contaminated wells and replaced a badly deteriorated storage tank. The system is now in compliance with state regulations.

Apple Valley, which is moving forward with its eminent domain action against Apple Valley Ranchos, wants to limit its seizure of Algonquin/Liberty’s assets to just those in Apple Valley. That may be unrealistic, given that Algonquin/Liberty acquired the Yermo system under the auspices of Apple Valley Ranchos. The courts would not be likely to force the sale of Apple Valley Ranchos to the City of Apple Valley and leave Algonquin/Liberty with the responsibility of providing drinking water to a remote desert community involving roughly 920 residents living on 280 properties.

More likely is that when or if the eminent domain decree is granted, Apple Valley will need to take on responsibility for keeping water flowing to the community 36 miles distant from the town.

This week, the Apple Valley Town Council voted during a specially-called meeting on Thursday to schedule with the San Bernardino County Registrar of Voters a special election on Tuesday June 6 seeking voter authorization to issue up to $150 million in bonds to finance the town’s acquisition of the Algonquin/Liberty Utilities’ water system. If the bond issuance is passed, town officials said, the bonds would be debt serviced by revenues generated by the water system.

Source: Venturi, San Bernardino County Sentinel http://sbcsentinel.com/2017/03/price-on-apple-valley-water-takeover-approaching-150m/