The Southern Water and Sewer District and the Prestonsburg City Utilities Commission are negotiating the “complete unwinding” of an asset transfer that was approved in 2017, according to testimony provided in Frankfort by Southern Water Chairman Jeff Prater and comments made during an interview with PCUC Interim Superintendent Brian K. Music. The hearing was held in a Kentucky Public Service Commission case in which Southern Water is seeking an emergency rate increase of 32.3 percent because of what officials say is a “dire” financial need.

Prater testified about the state of the district’s financials when he and the other four commissioners were appointed to the commission in February. 

“The district’s losing $40,000 to $50,000 a month, or taking in $40,000 to $50,000 less than  the  cost  of operations, not even considering depreciation,” Prater testified. “So, there was a negative cash flow, a lot of bills that had accumulated for various reasons and it just — the system was and still is in dire need of some additional cash flow to address various concerns that we have. You have to have adequate money to operate the district and there is just not enough revenue at this point to operate it.” 

Southern serves about 5,400 customers in mostly Floyd County, and in 2017, the PSC approved a transfer of assets that transferred the sewer infrastructure Southern had in Wayland and Eastern and some water customers the district had along U.S. 23 in the Harold area to the Prestonsburg City Utilities Commission, with Prestonsburg paying more than $2 million, as well as providing Southern Water some equipment.

Prater told the PSC that Southern Water is still collecting between $8,000 and $10,000 a month in revenue from the sewage plants in Eastern and Wayland. That part of the asset transfer was completed last summer, PSC filings show, but Southern Water is still not transferring those funds to Prestonsburg, as required in the deal. Southern Water owes Prestonsburg more than $130,000 for sewage collections, Prater testified.

Answering questions about the failure to transfer those funds, Prater told the PSC that the two entities are working toward the possibility of backing out of the transfer entirely. 

“Prestonsburg City Utilities Commission and Southern Water and Sewer, we are currently negotiating the possibility of transferring all of those assets or a complete unwinding, if you will, of the entire deal,” Prater said. “They have provided us with a lot of financial data that we’re reviewing at this time. We’re looking at operational costs and that financial data at this time, but we are negotiating with the possibility of unwinding the entire deal and Southern taking back the wastewater treatment and the water customers.”

Music confirmed the negotiations on Monday, saying they are still in the “infancy” stage.

He reported that he and Prater have met several times to discuss an unwinding of the deal, attempting to come to a resolution that the boards of both water districts can approve. 

“We are actually looking to see what an unwinding would look like,” Music said. “So, we’re kind of negotiating, kind of going back and forth, trying to see what it would look like for everybody to do that. Nothing is in stone right now, but that’s the direction it is going.”

He isn’t sure how long the process will take, saying it’s “pretty complicated,” but he believes that it will benefit both utilities. 

“It’s been pretty complicated and complex, but I think we can come to a resolution that would be positive for both entities,” Music said. 

PSC Chairman Michael Schmitt reported in the hearing that the PSC did not hold a hearing when it approved the asset transfer in 2017, and he noted that was “probably the last time that this commission will ever do anything like that without a hearing.”

He voiced his frustration about the issues surrounding the asset transfer, explaining that there was sworn testimony on both sides and that a fair market value for the transfer of assets was agreed up, and then, in another rate case filed by Southern Water, the PSC learned the deal had not been finalized. 

The same attorney, Schmitt pointed out, represented both PCUC and Southern Water in the asset transfer. He asked Southern Water officials to provide documents of any conflict of interest forms signed by both parties. 

Schmitt said he is “disappointed that it happened,” and shared his “own opinion” about alleged political pressure that led to the asset transfer in 2017.  He said it “basically constitutes a fraud” on the PSC “to the detriment” of Southern Water. District officials have blamed the loss of customers in the Harold area for its financial problems. 

Schmitt said the PSC must approve any potential “unwinding” of the asset transfer. 

“So if you get to the point where maybe you’re unwinding something, maybe you ought to tell us or file something here so we can go through it in a public hearing and make sure that the public knows what’s going on everybody can evaluate the benefits and the burdens to each system,” Schmitt said. 

Prater said Southern Water plans to reach an agreement with PCUC “in principal” and get PSC prior to moving forward. 

He said part of the problem with the asset transfer was that U.S. Department of Agriculture’s Rural Development wanted PCUC to absorb more of Southern’s debt as part of the deal. 

“We’re working on the premise now of trying to unwind everything back to the original status where that Southern would be owner and operator of the three wastewater treatment plants and we would take back the operational and everything associated with the approximate 1,200 water customers,” Prater said. 

Schmitt asked whether the two systems have discussed the possibility of merging, and Prater said there haven’t been any talks about a merger between the two utilities. 

He did say, however, that two companies, Kentucky American Water and a company from Virginia, have expressed interest in buying Southern Water. 

The Southern Water commission discussed the possibility of a sale prior to hiring Utilities Management Group to manage the district in March. 

Prater said commissioners sought a management contract instead of a sale because they wanted to see if they could “make it a viable organization.”

Prater said the district would seek to procure another contract in the future, noting that it may be necessary to extend the UMG contract so the procurement process can be completed. 

Prater said UMG has deferred its billing because of the district’s financial problems.  He said he believes UMG’s work has “made an immediate impact” on cost savings in the district by reducing overtime and fuel costs and reorganizing work processes. 

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