CLWSC deal called "fair"

By Scott Mahon, Editor

After studying the proposed sale of Canyon Lake Water Supply Corp. to San Jose Water Corp., an Austin engineering firm concluded that the offer was a "fair" offer for the local water utility.

GDS Associates of Austin was contracted by CLSWC to make an assessment of the proposed sale, although GDS officials said their assessment was not "a formal appraisal, a determination of due diligence, or a legal opinion."

"We made an independent review of available information on both companies on issues important to the transaction," the study reported. "Based upon our interviews, we believe that CLWSC has three primary reasons for wanting to sell the corporation to SJW, including quicker access to capital for modification and expansion of the water system; easier access to professionals experienced in the management and operations of water utilities and maintenance of local input by having existing customers on the board of directors."

In addition, the report noted that SJW has three primary reasons for wanting to acquire CLWSC, including SJW's belief that the Canyon Lake region is an opportunity for its expansion, the compatibility of the two companies and SJW's management experience that canbe ujsed to help CLWSC.

CLWSC Public Relations Manager Robert Case said the study was commissioned after some CLWSC members expressed their concerns during recent public meetings that the offer by SJW was a fair offer.

SJW has offered to buy the assets and liabilities of the local non-profit water company for $23.2 million.

The CLWSC board of directors voted two weeks ago to accept the offer and to recommend it to members who must approve the transaction in a special election on Nov. 5. at 1 p.m. at Mountain Valley School in Sattler.

Members will also vote to amend the Articles of Incorporation to permit the distribution of $3.2 million of the sale proceeds to members.

Thomas Gebhard, managing director of GDS, presented the assessment's results to the CLWSC board last Wednesday during a regular board meeting.

"We flew to San Jose and visited with SJW's management, looked at their operation and visited the California Public Utility Commission," Gebhard said. "Our basic objective was to look at all the facts and determine whether we believed the proposed offer was fair. But some members have asked if you could have gotten a higher value for Canyon Lake Water Company, and we can't answer that because it would be pure speculation. But what we did decide is SJW's offer is fair, and we believe that the procedures the board followed in putting the transaction together were very appropriate and we can't criticize it."

Gerhard said CLWSC faced a number of issues, including the lack of expertise to deal with Texas regulatory agencies.

"We found, however, that SJW does have the ability to address regulatory issues," he said. "They also have the ability to invest in CLWSC."

Gebhard said one of the more important results of the sale would be the change in Canyon Lake Water Company from a non-profit utility to an investor-owned utility.

"There are some benefits to being an investor-owned utility," he said. "But also, SJW can has the fiscal ability to invest in Canyon Lake Water. In fact, they've added about $40 million in additional plant capacity to their own operations in San Jose."

Gebhard noted thata SJW had operating revenues of $166 million in 2004, and reported operating income of $24 million.

In contrast, CLWSC's operating revenue in 2004 was $3.8 million and it had a net operating income of $646,527.

Gebhard said SJW's assumption of CLWSC's $20 million debt would be a benefit to the new Canyon Lake Water company.

"Twenty million of debt represents almost $3,000 per member," he said. "And if you asked us if the proposed distribution of $3.2 million to members is equitable, I'd say yes, it is. In fact, it's higher than other transactions we've studied."

Qualified members who will not be attending the special election on Nov. 5 may vote by proxy.

The proxies were mailed Monday, Oct. 17 and must be received by CLWSC by Friday, Oct. 28.

Members voting by proxy may either assign their vote to the proxy committee of the board of directors of CLWSC or designate another person to vote for them at the special election.

The CLWSC proxy committee has stated its intention to vote in favor of the sale.

A SJW subsidiary Texas Corporation, called SJWTX, will assume or retire CLSWC's bonded indebtedness of approximately $20 million before the sale can be finalized.

SJW elected to bear the cost of the $50,000 study by GDS whether or not the transaction is approved by CLWSC members.

If members approve the sale, CLWS would be dissolved and SJWTX would operate the water system under the proposed name of Canyon Lake Water Supply Company.

The new company will not seek a state-approved rate increase for a period of two years and will designate three members of the current CLWSC board to fill positions on its new eight-member board.

To view the assessment report, go to CLWSC's Web-site at www.clwsc.com.

     
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