As addressed in a recent column, Housatonic Water Works (HWW) will nearly double its average customer’s water bill over five years. While horrid for ratepayers, the higher rates will not assist HWW’s efforts, announced in an October 1 letter, to sell itself to the town. Shed no tears, as HWW has found other ways, at least on paper, to enhance its value. But even with HWW’s accounting chiropractics, its owners’ prospects to sell the company for profit are murky, like its water.
Just as it is tidying itself up for sale and preparing for its October 16 Zoom meeting with the town, on October 8 the Massachusetts Department of Environmental Protection (MassDEP) issued an alarming administrative order, described in its October 9 letter concerning unhealthful manganese levels:
Infants up to one year of age should not be given water with manganese over 0.30 mg/L, nor should formula for infants be made with that water for more than a total of 10 days throughout the year.
Outside of Flint, Mich., the MassDEP order would shock any utility, but that was just a Tuesday for HWW. Worse, and you are wondering how it can be worse, the order reveals that HWW concealed this critical information from customers, including parents whose infants are “most susceptible to excess manganese exposure because of their developing neurological and gastrointestinal systems.”
By concealing the test results since July 24, HWW purposefully put its customers’ health at risk. One can debate whether a corporation acted with misfeasance or malfeasance. The former suggests that the harm to another was by mistake, while the latter suggests the harm was by intent. No debate here. Failing to report unhealthy water tests for months is malfeasance. We need to take the keys away from HWW’s management before they harm again.
HWW’s sale efforts are substantially hindered by its dreadful market timing. Not the best time to propose a sale, given the town’s nearly empty coffers also need to cover school and bridge repairs. Of course, no one should count HWW’s owners out, practiced as they are at the art of selling an inferior product for a premium price. Still, as anyone who put a house on the market in 2008 or 2020 will tell you, timing is everything.
And then there is the economic reality that HWW has only one potential buyer, the town. No third entity is interested in buying an aging brown-water/manganese/Halocetic acid (HAA5) distribution system in need of approximately $40 million in repairs/upgrades over the next 20 years. Having only one buyer means that HWW is subject to the rules of monopsony, a market with a single buyer (addressed previously). In such markets, the seller, HWW here, lacks pricing power.
We know—thanks to Stockbridge Select Board member Patrick White—that if Great Barrington seeks to purchase HWW, the company’s 1897 charter provides the pricing formula. The 1897 charter is akin to an options contract giving the town the right to pay no more than the formula dictates for HWW. Of course, the town also has the right not to exercise its option, just as it has been doing for over 125 years. HWW is subject to a price-depressing ceiling but is not subject to a price floor. If HWW wants to sell, the town can pay substantially less than the 1897 charter permits.
With the 1897 charter in mind, it appears HWW’s managers have spent more time cleaning up the company’s balance sheet than its water. Their rationale may be that if they can juice HWW’s value under the 1897 formula, they can pitch to Town Meeting voters that they are agreeing to sell at a discount to the formula price. As negotiating tactics go, this is the equivalent of an employee asking for two weeks’ vacation when only one is wanted.
HWW supported its June 2023 DPU rate-increase application with a Water Rate Study, a copy of which can be found here. It appears from the Water Rate Study that certain balance-sheet maneuvers were undertaken with an eye toward the 1897 formula. The balance sheet revisions may be completely legitimate—questions of legitimacy are best left to CPAs, not a columnist lacking an accounting background. For now, let us just say the revisions appear interesting.
The charter provides that the town shall have the right to purchase HWW on payment of the cost of company property plus a five percent return. “Cost” means depreciated cost. Pipes installed for $10,000 in 1984 (“original cost”) are valued today at their depreciated value. If the pipes had a service life of 50 years subject to a straight-line depreciation rate of two percent per year, the pipes’ depreciated value after 40 years of service would be 20 percent of the original cost, $2,000 today.
If a company wanted to carry greater “costs” on its books, one way to achieve that would be to adjust the service-life/depreciation rate for tangible assets. For example, if pumping equipment purchased in 2014 had a service life of 10 years, the equipment would be carried on the books today at zero cost. But if management doubled the pumping equipment’s service life, the pump today would be on the books at half its original cost. Without getting up from their computer, the company’s managers just made the company more valuable.
With that in mind, take a look at HWW’s 2023 Water Rate Study once again. In particular, Schedule C-3(w). The schedule sets forth HWW’s prior and revised asset costs. You will note then on Schedule B-3(w) that the company has a sudden additional value for its “Utility Plant in Service” of $4,247,735. Turning balance sheet lead into gold has an Enron-like accounting quality to it, but, again, let us leave that analysis to accounting folks who understand how an entity with carrying costs of $3,240,953 can suddenly be valued at $7,354,974. Perhaps HWW will explain how it determined it is suddenly worth twice as much.
It is rumored that HWW’s owners are seeking as much as $20 million for the company. If true, then HWW’s owners need to curb their enthusiasm. HWW faces one other immutable force: Town Meeting voters with disdain for HWW and accounting tricks.
Voters likely agree we need to both resolve the Housatonic water crisis and not reward HWW’s owners for failing to properly maintain a utility now facing a $40 million liability. Voters have no appetite for overpaying for HWW or its water.
Scoff if you will—and you should—but the surveys appended to columns do provide (limited) insight into what town voters are thinking. An internet survey lacks empirical value, but it is not nothing. The recent survey, detailed below, reflects that slightly more than 50 percent of respondents would approve of paying $1 million for HWW, while less than 10 percent would vote to pay $3 million or more. The survey results should compel HWW’s owners to assess what they can reasonably expect to realize in a sale requiring voter approval.
Since 2021, HWW has been a money-losing enterprise. We can presume that MassDEP’s administrative admonishments will continue. HWW’s owners cannot enjoy delivering unhealthy water to their customers and receiving repeated corrective orders from MassDEP. Would it surprise me if under these circumstances HWW’s owners announced at the October 16 Zoom meeting that they have decided to simply give the company to the town? Given the sales price rumors, of course it would, but walking away would really be the next best move for HWW’s owners and the town. Otherwise, this is not going to end well.
Survey Monkey Question
Here is a link to the following Survey Monkey poll: “Would you only approve the purchase of Housatonic Water Works Company for an amount substantially less than its 1897 charter provides?”
Survey Monkey Results
Here are the results of the following recent survey questions:
Question 1: “Would you vote to approve the purchase of HWW for $1 million?”
Answer: Yes – 52.38 percent
Question 2: “Would you vote to approve the purchase of HWW for $2 million?”
Answer: Yes – 27.91 percent
Question 3: “Would you vote to approve the purchase of HWW for $3 million?”
Answer: Yes – 9.76 percent
Question 4: “Would you vote to approve the purchase of HWW for $4 million?”
Answer: Yes – 4.88 percent
Question 5: “Would you vote to approve the purchase of HWW for $5 million?”
Answer: Yes – 4.88 percent
Days Great Barrington has held Community Access Fees hostage: 222
