Financial expert explains discrepancy in EPCOR valuation (April 21, 2021)
BULLHEAD CITY — A financial expert who provided an appraisal of the value of EPCOR Water Arizona spent most of Wednesday explaining differences in valuations of the utility’s Bullhead City system.
Robert Reilly, a managing director at Willamette Management Associates, testified during the third day of the evidentiary hearing in Bullhead City’s condemnation case against EPCOR. Reilly was hired by Baker Donelson, the law firm hired by EPCOR, not only to prepare a business appraisal but to review an appraisal by Raftelis Financial Consultants, a firm hired by the city to place a value on the local water system.
At issue is the fair-market value — an agreeable sales price — for EPCOR’s Mohave and North Mohave systems in an eminent domain proceeding by the city to take over ownership and operation of the water utility. Rick Giardina, of Raftelis, put the value at $55 million; Reilly placed it at about $136 million.
Final arguments in the evidentiary hearing portion of the case in Superior Court Judge Charles Gurtler Jr.’s courtroom are scheduled to begin at 9:15 a.m. today. There has been no timeline given for Gurtler to announce his findings.
Reilly was the only witness to take the stand Wednesday.
Under questioning from Joe Conner, lead counsel for Baker Donelson in the condemnation case, Reilly outlined what he did to reach his figures — he described a number of appraisal and accounting concepts and said he relied heavily on financial information and projections from EPCOR management. After spending much of the morning on that process, attention shifted to Reilly’s review of the valuation report submitted by Raftelis.
Reilly said his review of the report was based on two main questions: “Are the analyses supported and are the conclusions credible.”
He said his answer was “no” to both. The findings were “not supported or supportable and, therefore, the conclusions aren’t credible,” he said.
After going through “a number of technical issues,” some as minor as incorrect terminology and others more impactful such as using incorrect figures or interpreting figures incorrectly, he concluded:
“There’s at least a $95 million mistake there,” Reilly said. “That’s not an opinion issue, that’s a mistake, a $95 million mistake.”
He said the “terminal year” projection of capital expenditures and depreciation included numbers that were more than $4 million apart.
“The system gets to depreciate 100% of what they spend,” Reilly said.
Later, though, he amended the practicality of that, noting that his own figures had a difference of about $750,000 between capital expenditures and depreciation in the terminal year — the last year of a 20-year projection and what would be expected in the 21st year — and every year afterward.
Reilly admitted that the figures rarely are exactly equal, but said that entering the end of the 20-year period, they should be substantially closer than Raftelis’ projection. He said it wasn’t simply a $3 million-plus adjustment — it was a $3 million-plus adjustment every year thereafter. He said that numbers he used produced a total of $98 million in capital expenditures — investments into the water system — and $94 million in depreciation over the 20-year projection period; numbers Raftelis used produced $164 million in capital expenditures and $102 million in depreciation.
“That’s unreasonable,” he said.
He said adjusting the numbers used by Raftelis to numbers from EPCOR — numbers he said he considered more reasonable — produced a $95 million addition to Raftelis’ $55 million valuation.
Under cross-examination by Christopher Kramer, lead counsel in the case for Jennings Strouss and Salmon PLC, Reilly was questioned repeatedly about the accuracy of numbers he used in his projections. Kramer asked if it was reasonable to expect EPCOR to project capital expenditures of $68 million in the first 10 years of the period and $30 million in the second 10 years, or to see annual projections flatlined at $3 million annually over that second 10-year period.
“I really don’t have an opinion,” Reilly said. “You’ll have to ask management.”
He deferred other answers to Gannett Fleming, a construction management services provider that also placed the value at $136 million.
Reilly said he performed “limited” due diligence to verify EPCOR’s numbers and projections.
“… without independent verification or confirmation,” he said, adding that he had used that phrase several times during his testimony.
He said he was hired to perform an appraisal of a going concern business and to review the work done by Giardina.
Asked if he relied on data provided by EPCOR management to perform those tasks, Reilly replied, “Absolutely.” He said it didn’t “necessarily” raise any concerns that he was using management numbers to prepare a report being paid for by the law firm representing the client.
He said another discrepancy in the valuations came from defining what was being valued. He said his appraisal was of the EPCOR business while the Raftelis evaluation was primarily of the utility’s tangilble assets.
“This is not a tangible personal property dispute,” he said.
Reilly, under redirect from Conner, concluded that the Raftelis report was inaccurate “because of the assumptions he makes.”
He said using the methodology employed by Rafetelis “absolutely and positively won’t give you the fair-market value of the business.”
After Reilly’s testimony concluded, Conner announced that EPCOR was resting its case.
Source: Bill McMillan, The Mohave Daily News