Hingham Journal Letter
The coverage in the Hingham Journal of the recent town meeting on the financial analysis by AndersonTax of the potential water company acquisition by the Town missed the key findings that came out of the meeting. AndersonTax, an independent consultancy (risen from the ashes of Anderson Consulting) carefully explained the reasons behind the differences in the Town and Aquarion’s estimated future operating costs. Their consultant, with 30-years of utility company valuation analysis, noted the following:
An acquisition has no implications for Hingham tax payers (and doesn’t affect the Town’s AAA rating or borrowing capacity). It will be paid for by the rate payers, the people who consume the water. The re-investment in infrastructure and the rate of projected inflation are moot issues as well, since both parties face those issues equally (although costs for re-investment are higher for Aquarion given their 10% return-on-asset mandate). The crux of the meeting was whether the rate payers would be better served financially under Aquarion or the Town. The answer to this depends on complex financial assumptions, which neither Aquarion nor the Town got quite right according to AndersonTax. What can be clearly agreed upon is the following:
The town has the following financial advantages: no 10% return on assets to shareholders; no income tax; no rate filing costs; and lower borrowing costs than a private company
The town has the disadvantage of higher labor costs due to wage agreements, but given limited staff, this is immaterial to the overall financial picture. The bigger cost is having to pay for the acquisition.
The differences in the Town and Aquarion’s calculations are mainly due to different assumptions on:
a) projected rate increases (understated by Aquarion, based upon past approved rate increases)
b) borrowing costs (Aquarion incorrectly used the Town’s borrowing rate, which is about 30% higher for a private company than the Town’s rate)
c) Aquarion neglected to add inflation to capital expenditures, effectively reducing ability to re-invest
d) the Town underestimated the cost to have a third-party run the water company
In the end, the consultant concluded that the financial savings to the Town would be an average of $1.5M annually over 30 years including the acquisition cost, not $3M annually as the Town had projected. He also noted that the cost for Aquarion to run the water company would not result in any savings; rather, it would cost the Town rate payers about $1.5M a year more than it would cost the Town. The real eye opener, however, was that after the 30-year bond to acquire the water company is paid off, the Town’s next generation would save in excess of $7M annually going forward.
There are many other variables that still need to be discussed by Town leaders before an acquisition can go before a Town vote, including governance. From a financial perspective, the conclusion of the meeting was that even if the assumptions are still off a bit, it is highly likely, as current residents, the rate payers will still come out ahead financially under Town ownership. With the prospective of $7M savings a year once the acquisition is paid off, the Town’s potential acquisition of the water company is not about its current residents: it is about the next generation.
Marco Boer, 33 Elm Street, Hingham