Apple Valley Ranchos’ Takeover Of Yermo H2O Complicates Town’s Plan

(July 21) Apple Valley Ranchos Water Company’s pending acquisition of the long-troubled Yermo Water Company has tossed a monkey wrench into the works as the town of Apple Valley persists in its bid to acquire the currently privately-owned water company.
The circumstance relating to the town of Apple Valley’s move toward becoming a full service municipality – in this case involving owning its own water utility – comes across as a tale of lost opportunity on the part of a slow-learning and even slower-moving governmental bureaucracy being constantly outhustled by the more dynamic and profit-motivated private sector.
The Apple Valley Ranchos Water Company was created in 1945 by Newt Bass and B.J. Westlund as an adjunct to their real estate company, Apple Valley Ranchos. Apple Valley Ranchos was their undertaking to develop Apple Valley after they acquired 6,500 acres from the Southern Pacific Railroad for $2.50 per acre. Their intention was to install the minimum amount of infrastructure to support the construction of subdivisions and make the community grow, anticipating that as Apple Valley matured, that infrastructure would be replaced by higher quality pipes, reservoirs, pumping units and appurtenances. It would turn out, however, as the town was built piecemeal, the water company merely expanded with it, a hodgepodge of water mains and lines built one after the other, patched together in correspondence to the new development it was called upon to serve.
In 1987, Park Water Company, which was then owned by the Wheeler Family and provided water to Compton, Downey and Norwalk in Los Angeles County, acquired the Apple Valley Ranchos Water Company. When the town incorporated in 1988, city officials had the opportunity to purchase the company for $2.5 million, but declined, choosing not to convert the Apple Valley Ranchos Water Company to a municipal division, concerned less about the initial expense of acquiring the utility than with the projected ongoing and constant costs of having to repair, upgrade and maintain the system. In 2011, the Carlisle Group acquired from the Wheeler Family at a cost of $102.2 million the Park Water Company, which in addition to its Los Angeles County and Apple Valley holdings, also owns the Mountain Water Company, based in Missoula, Montana, serving some 50,000 people there. The acquisition of Park from the Wheeler Family was part of the Carlyle Group’s long term investment strategy of acquiring assets that can immediately return money in terms of sales of a commodity, in this case water, to a reliable customer base, while representing a future sales profit potential, whether those assets are spun off individually or collectively.
In 2011, the town of Apple Valley impaneled a so-called blue ribbon committee to consider acquiring Apple Valley Ranchos, which ultimately advised against the acquisition. Prevailing sentiment abruptly changed in 2014, however, when Park, after beginning to implement in 2012 rate increases on Apple Valley Ranchos customers totaling 19 percent and then completing $8.1 million in capital improvements to the Apple Valley Ranchos water system in 2014, instituted another 30 percent rate hike on Apple Valley Ranchos customers to be implemented from 2015 until 2017. Shortly thereafter, town officials began trading notes with Missoula city officials, where Park Water’s Mountain Water Company had likewise escalated rates.
Subsequently, the city of Missoula utilized its power of eminent domain to condemn and seek to acquire Mountain Water Company from Park Water Company. Mountain Water fought the takeover, but when the matter went to trial before Judge Karen Townsend in April it resulted in Townsend on June 15 entering a judgment in favor of Missoula.
Even before Missoula prevailed in that case, town of Apple Valley officials began angling to take Apple Valley Ranchos away from Park Water Company. As articulated by the town, it believes it will be able to purchase Apple Valley Ranchos through a financing strategy involving issuing bonds and that it will be able to service the bonded indebtedness and carry out improvements to the water system by means of the payments made to the town by water users/customers, i.e., the town’s residents. The town’s officials maintain that the revenue from the water sales will be dedicated solely to this bonded debt service and water division operations and maintenance. The town further maintains this can be effectuated without any water rate increases.
This scenario is highly dependent upon Park Water’s willingness to sell the Apple Valley Ranchos Water Company’s full assets for a price of the town’s choosing, i.e., around $50 million. In support of this, the town obtained from what it referred to as “an independent appraisal firm” the rather wishful “fair purchase price” of $45.54 million.
Decades ago, further out in the desert in Yermo, Donald Walker had acquired the Yermo Water Company. Walker saw the water company, which had exclusivity in the Yermo desert community, as a profit generating entity, one that could be maintained with very little devotion to maintenance or upgrades. By the late 1990s the company’s pipes and pumping systems were falling into a state of disrepair. The situation was exacerbated in the early 2000s when Walker relocated to Florida, leaving the neglected and undercapitalized company in the hands of a resident of the area with no expertise or real understanding of how to run a water company, who served as its part-time manager. Despite the importuning of customers and local authorities, Walker refused to hire a licensed operator to look after and operate the system.
During the summer of 2006, the primary water tank serving the Yermo community’s water system developed a leak and customers were without water for a week in the small community near Barstow, where temperatures exceeded 100 degrees every day. The California Department of Health and the California Public Utilities Commission initiated an investigation into the matter in 2007.
A decision to pursue the appointment of a receiver was issued in May of 2009. At that time, however, a community-based prospective buyer had surfaced and the receivership was suspended while it appeared that a sale of the system was possible.
After more than two years of negotiations, Walker refused to inform the prospective buyer how much he owed in back taxes and fines to the California Department of Health. As a result, the sale fell through. In August 2012 the California Public Utilities Commission filed to take control of the water company. Three months later, the Superior Court entrusted operation of the Yermo Water Company to the Yermo Community Services District and appointed California Public Utilities Commission Attorney John Richardson to act as receiver. The Yermo Community Services District then made $40,000 in emergency renovations to the system to keep it functioning.
The receivership arrangement that took place in November 2012 was contested by Walker’s family. His wife, Charlene, filed an opposition to the appointment of a receiver, raising a number of claims that were ultimately denied by the Superior Court on March 6, 2013.
In July 2013 Apple Valley Ranchos, acting on behalf of Park Water Company, bid $300,000 on the purchase of the Yermo Water Company. Subsequently, Bob Smith, president of the Yermo Community Services District, acquiesced in Richardson’s decision to accept Apple Valley Ranchos’ offer.
Despite those developments, there have been delays in Apple Valley Ranchos getting full clearance to make the acquisition of the company. Officials with the town of Apple Valley, sensing that Apple Valley Ranchos taking full possession of the Yermo Water Company would significantly increase the value of Apple Valley Ranchos and make any effort to acquire it yet more expensive, moved to prevent that eventuality, including petitioning the California Public Utilities Commission to require that Apple Valley Ranchos conduct a California Environmental Quality Act review to proceed with the purchase. The Public Utilities Commission ruled that Apple Valley Ranchos is exempt from performing such a review and in February approved the sale.
On July 15 Apple Valley Ranchos officials met with Yermo residents at the Yermo Community Service District’s meeting hall to provide information relating to the company’s takeover of the Yermo water system, indicating the San Bernardino County Superior Court approved the purchase on June 24. That was followed up with an announcement on July 20 that the company has tendered a $300,000 final offer for the water system and that it anticipates closing escrow late next month.
Park intends to move ahead with widespread improvements immediately after taking possession of the system. Funding for those improvements will come from Carlisle Group/Park Water Company investments as well Proposition 1 grant funds.
This throws a kink in the town of Apple Valley’s plans to subsume Apple Valley Ranchos.
Earlier this year the town publicly declared it “would like to purchase the company in a negotiated transaction.” That was met by Park’s response that Apple Valley Ranchos Water Company is not for sale. To town officials’ consternation, they learned that Park is in discussions with Algonquin Power & Utilities Corp., a Canadian utility company, for the sale of all of its California and Montana assets. A publicly disclosed offer was $327 million.
The $45.54 million the town’s “independent” appraiser said Apple Valley Ranchos is worth previously appeared unrealistic; Apple Valley Rancho’s expansion to include the Yermo Water Company now makes it appear even more so.
Word leaked out two months ago that despite Park Water’s insistence that Apple Valley Ranchos was not for sale separately, the town made an informal $50 million offer to purchase the company. That offer, the Sentinel is informed, was met by derision from Park Water corporate officers.
Consequently town officials have undertaken a more realistic assessment of what will be required to persuade Park Water to sell Apple Valley Ranchos to the town. According to town officials’ analysis, “Based on our understanding of the announcement by Algonquin Power & Utilities Corp., the purchase price was $257 million ($327 less $70 million in assumed debt) – well more than double the $102.2 million purchase price paid by the current owners, the Carlyle Group, just three years ago.”
Calling that number “over-inflated,” the analysis moves on to state “any discussion of the acquisition of Apple Valley Ranchos must begin by separating it from the other two entities in the Park Water portfolio: Park Water in Los Angeles and the Mountain Water Company in Missoula, Montana. The town is interested only in Apple Valley Ranchos – one third of Park Water. One third of the announced purchased price by Algonquin is $86 million, which is within the range of possible values anticipated.”
Armed with Judge Townsend’s ruling on the Missoula case, the town is yet considering its eminent domain options. That strategy would entail convincing a judge that the public benefit of a forced sale would outweigh Park Water’s property rights. To that effect, the town has already propounded such a theory, stating publicly, “Apple Valley Ranchos is not a normal company. It has a government-granted monopoly over the provision of drinking water in its service area. As a customer, you don’t have the opportunity to buy your water from someone else, which means you are at the mercy of the company and the California Public Utilities Commission when it comes to how much you will pay and how much profit Apple Valley Ranchos makes. Choice, a fundamental component of the free market, is non-existent when it comes to Apple Valley Ranchos. With a municipally owned water system, you have a voice. Eminent domain gives municipalities the ability to acquire private property if it is determined there is a compelling public interest in doing so. If Apple Valley Ranchos refuses to sell our system to the town, this might be an option. The final purchase price under eminent domain would be set by a court based upon ‘just compensation’ – a fair purchase price.”

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