NOW THAT FAIR VALUE ACQUISITIONS ARE HERE NOW

NOW THAT FAIR VALUE ACQUISITIONS ARE HERE… NOW WHAT? Danny Kermode CPA Assistant Director of Water & Transportation Washington Utilities and Transportation Commission

DISCLAIMER The opinions expressed in this presentation are my personal opinions, they do not necessarily reflect the opinions of the Washington Utilities and Transportation Commission, its commissioner or other staff. 2

Municipal Water Company Target 26, 000 Customers Pry Vet Water Company 480, 000 Customers 3

Muni System – Pry Vet Co. 26, 000 Customers Pry Vet Water Company 480, 000 Customers 4

Issue – Should the cost of the Muni System –price Pry Vetbe excess purchase Co. 26, 000 borne by all customers or just Customers those that receive benefits of the purchase? Pry Vet Water Company Standard Approach - Single Tariff Pricing (STP) 480, 000 aka Uniform Rates Customers Discussion: (a) Using STP - Socialize (All customers pay) (b) Cost Causers/Benefit Recipient 5

Muni System – Pry Vet Co. 26, 000 Customers Pry Vet Water Company 480, 000 Customers 6

Muni System – Pry Vet Co. 26, 000 Customers Pry Vet Water Company 480, 000 Customers • Use of STP – Uniform rates • Economies of Scale • Private vs Public target • Gain for ratepayers 7

Recovery Period of Acquisition Adjustment • Regulatory [legislative] Asset, • Allocation of purchase price to assets – • Not Allowed under USo. A, • FASB – GAAP follows regulatory treatment ASC 980 -35 -1 • Suggestion - Match life of Water/Waste water plant in general (40+ years).

Cost of Capital • The acquisition adjustment has a different risk profile than normal utility-plant-inservice, which should result in a lower equity return.

The logical solution [to getting the acquisition price right is to] Limit the acquisition premium …to the cost savings promised by the consolidation. - Scott Hempling 2019 Thank you