Correction of Economists.com Cash Flow
and Rate Impact Analysis
Two reports have been prepared. One looks at the errors in the Economists.com cash flow analysis that was provided in mid-October by the PSWID board. This report also provides a corrected version of the cash flow and rate impacts for the purchase assumptions that the PSWID board is using.
The second report starts from the corrected cash flow and rate impact analysis and looks at more realistic value of purchase price, loan terms, and interest rates.
Corrections Executive Summary
Additional Scenarios Executive Summary
[New 02/26/2009] There has been a some recent back and forth between the board and myself over the errors in the Economists.com analysis. The back and forth consists of a set of Letters to the Editor in the Payson Round-up, a letter by Mr. Dan Jackson of Economists.com to the PSWID board, and my response to Mr. Jackson's letter.
The full correction report is available here. Below is the Executive Summary from the report.
Corrections Executive Summary
This paper is an analysis of the document that was produced by Economists.com as a cash flow and rate analysis for the PSWID board. There are several significant errors in the Economists.com analysis which results in the conclusions that were made in the analysis being invalid. The major errors are:
- The analysis starts from the 2006 annual ACC reports for Pine Water Company (PWCo) and Strawberry Water Company (SWCo). In 2006, 8,245,000 gallons of water were sent from Strawberry to Pine. The Economists.com report does not correct water usage and revenues for that transfer.
- The 2006 ACC reports include the sales taxes collected as part of Metered Revenue and then subtracts them out as Taxes Other Than Income in the operations expenses. The Economists.com analysis uses the Metered Revenue, but it also uses the operations expenses estimated in a Coe and Van Loo (CVL) report which did not include Taxes Other Than Income. As a result the Economists.com analysis is counting sales tax receipts as operational revenue.
- The Economists.com analysis says that operations expenses will grow “by approximately 4% per year”, but in 2011 the growth in the Economists.com analysis is only 1.24%.
- Salaries and Wages are understated in the CVL operations expenses report. They do not take into account the extra overhead expenses of hiring an outside company to run the water system and the need for an administrative assistant.
- The Economists.com analysis uses a three tier rate structure. The Pine rate structure is three tiers and the Strawberry rate structures are two tiers. To merge them properly, there needs to be a four tier structure in the Economists.com analysis.
- In order to correct for errors in the 2009/2010 portion of the rate analysis, the water sales are heavily skewed towards the highest cost tier. When the errors being corrected for go away in 2011, the skewed data remains.
The conclusion of the Economists.com cash flow analysis that was presented at the November PSWID meeting is that there is no need for a rate increase for the first two years. The material in Sections 3 and 4 of this document shows that the Economists.com conclusion is incorrect. A series of errors in the Economists.com analysis greatly overstates projected revenue and greatly understates projected operations expenses. In addition, Economists.com had to resort to using creative financing by having interest only payments for the first two years on the loans and a 25 year loan term in order to avoid immediate rate increases. Using that creative financing adds $1,037,932 over the life of the first two loans, compared to using the standard municipal 20 year loan.
The corrected cash flow analysis shows the need for an immediate rate increase in 2009. For Pine, the initial rate increases for 3000 gallon usage are $1.85 (4.9%) for summer bills and $7.99 (25.5%) for winter bills. For Strawberry, the initial rate increases for 3000 gallons of usage for the Williamson rates is $8.45 (27.4%), for the United rates is $16.70 (73.9%), and the E&R rates is $10.65 (37.2%). Strawberry’s rate increases are much larger than those for Pine because Strawberry currently pays much less for water than Pine. Consolidating the rates will produce a large initial increase for Strawberry rate payers. After that, everyone’s increases are the same. Years 2011 and 2012 will each see increases of approximately 12% and years 2010 and 2013 will see increases of approximately 3%.
For 5000 gallon usage, Pine residents will see increases of $1.85 (3.6%) for summer bills and $12.07 (29.3%) for winter bills. For Strawberry, the initial rate increases for 5000 gallons of usage for the Williamson rates is $15.45 (40.8%), for the United rates is $24.65 (86.0%), and the E&R rates is $15.30 (40.3%).
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The full additional scenario report is available here. Below is the Executive Summary from the report.
Additional Scenarios Executive Summary
The District has made an offer of $2,554,292 for the purchase of Pine Water Company (PWCo) and Strawberry Water Company (SWCo). The District plans to borrow an additional $2,000,000 to set up operations of the water District and initial capital improvements. The District plans to borrow $2,500,000 in 2012 for additional capital improvements. The District plans to finance this by using loans at 4.5% interest with a 25 year term and the first two years of the loan being interest only payments.
An Economists.com cash flow analysis, based upon a scenario for the purchase and financing of the water system, was commissioned by the District. This scenario is a very “best case” scenario. This report will look at a more realistic scenario’s for the purchase and operation of the water companies. This report addresses the following scenarios:
- $6,000,000 acquisition loan and a $2,500,000 CIP loan in 2012. Borrowed at 5.5% interest and paid quarterly. Creative financing loan terms of 25 years, with first two years being interest only payments.
- $6,000,000 acquisition loan and a $2,500,000 CIP loan in 2012. Borrowed at 5.5% interest and paid quarterly. Standard financing loan terms of 20 years.
- $8,000,000 acquisition loan and a $2,500,000 CIP loan in 2012. Borrowed at 5.5% interest and paid quarterly. Creative financing loan terms of 25 years, with first two years being interest only payments.
- $8,000,000 acquisition loan and a $2,500,000 CIP loan in 2012. Borrowed at 5.5% interest and paid quarterly. Standard financing loan terms of 20 years.
The use of creative financing adds 13.5% to the life time cost of the loans when compared to a standard financing approach. This ranged from an additional $1,898,696 to $2,345,449 over the life of the loans.
The purchase of the water companies will/should require an immediate consolidation of all of the current rate bases for Pine and Strawberry into one common rate base. That consolidation, along with the increase in rates needed to cover the costs of purchasing the water companies, will result in a significant increase. Rate payers would see increases in the following ranges, depending upon the specific scenario used, between current rates and the initial 2009 rates for 3000 gallons of usage:
- Pine, Winter: $13.63 to $22.81 (43.5% to 72.9%)
- Pine Summer: $7.49 to $16.67 (20.0% to 44.5%)
- Williamson: $14.09 to $23.27 (45.7% to 75.4%)
- United: $22.34 to $31.52 (98.8% to 139.5%)
- E&R: $16.29 to $25.47 (56.9% to 88.9%)
Rate payers would see increases in the following ranges between current rates and the initial 2009 rates for 5000 gallons of usage:
- Pine, Winter: $20.51 to $33.19 (49.7% to 80.5%)
- Pine Summer: $10.29 to $22.97 (20.0% to 44.6%)
- Williamson: $23.89 to $36.57 (63.1% to 96.6%)
- United: $33.09 to $45.77 (115.5% to 159.8%)
- E&R: $23.74 to $36.42 (62.5% to 95.8%)
Over the next five years, from 2009 through 2013, the total additional increase, over the initial increase, with 3000 gallons of usage for each of the scenarios is:
- $6,000,000 with Creative Financing: $14.15 (31.5%)
- $6,000,000 with Standard Financing: $12.13 (24.3%)
- $8,000,000 with Creative Financing: $15.37 (32.6%)
- $8,000,000 with Standard Financing: $11.95 (22.1%)
Over the next five years, from 2009 through 2013, the total additional increase, over the initial increase, with 5000 gallons of usage for each of the scenarios is:
- $6,000,000 with Creative Financing: $19.49 (31.5%)
- $6,000,000 with Standard Financing: $16.65 (24.3%)
- $8,000,000 with Creative Financing: $21.07 (32.6%)
- $8,000,000 with Standard Financing: $16.54 (22.2%)
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