JOINT PROPOSAL By and Among: New York American Water Company, Inc. Department of Public Service Staff

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1 NEW YORK PUBLIC SERVICE COMMISSION X In the Matter of the Petition of : New York American Water Company, : Inc. for an Update to its System : Improvement Charge : Case 14-W X JOINT PROPOSAL By and Among: New York American Water Company, Inc. Department of Public Service Staff Dated: May 20, 2015

2 NEW YORK PUBLIC SERVICE COMMISSION X In the Matter of the Petition of : New York American Water Company, : Inc. for an Update to its System : Improvement Charge : Case 14-W X JOINT PROPOSAL INTRODUCTION This Joint Proposal is made as of May 20, 2015 by and among New York American Water Company, Inc. ( NYAW, or the Company ) and the Staff of the New York State Department of Public Service ( Staff ) (collectively, the Signatory Parties ). This Joint Proposal sets forth the terms of settlement of the above-captioned matter for a two-year period commencing April 1, 2015 and ending March 31, This Joint Proposal provides for the continuation of the Company s existing rate provisions, as adopted by the Commission in Case 11-W and Case 11-W-0472, 2 with specific modifications provided below, and no change in base water rates during the rate years ending March 31, 2016 and March 31, 2017 ( Rate Year Four and Rate Year Five, respectively), or until new base rates are established by 1 2 See Case 11-W-0200, New York American Water Company, Inc. Rates, Order Determining Revenue Requirement and Rate Design (issued March 20, 2012) (Rate Order). See Case 11-W-0472, Joint Petition Aqua Utilities, Inc., Aqua New York, Inc. and American Water Works Company, Inc. for Approval of a Stock Purchase Agreement under which Aqua Utilities, Inc. will sell and American Water Works Company, Inc. will acquire 100% of the issued and outstanding capital stock of Aqua New York, Inc. (issued April 20, 2012).

3 the Commission. Further, this Joint Proposal is intended by the signatory parties to settle all issues in the above-captioned proceeding and to be presented to the Public Service Commission ( Commission ) for approval in its entirety since each provision is in consideration and support of all the other provisions. I. PROCEDURAL HISTORY NYAW is a wholly-owned subsidiary of American Water Works Company, Inc. and is a corporation duly organized and existing under the Transportation Corporation Laws of the State of New York. The Company provides various types of water service to its more than 125,000 customers in numerous communities in Nassau, Putnam, Ulster, Washington, and Westchester Counties. NYAW s Lynbrook rate district (formerly the Long Island Water Corporation) is currently operating under a rate plan that was established in the Rate Order and had a primary term of three years ending March 31, The plan remains in effect until modified by the Commission. On October 27, 2014, NYAW filed a petition with related exhibits requesting an update to its System Improvement Charge ( SIC ). According to the Company, updating its current, authorized SIC 3 (which is applicable to qualifying projects constructed in NYAW s Lynbrook District) will permit it to continue to construct, on a regularized basis, necessary capital improvements that will provide numerous benefits to its customers in a cost-beneficial manner. A list of the applicable projects, their associated benefits, and costs is set out on pages eight and nine of this Joint Proposal (infra), as well as within the applicable SIC 3 This System Improvement Charge was authorized by the Commission s Order in Case 11-W

4 tariff, annexed hereto as Appendix A to the Joint Proposal. All of the projects are currently under construction or in the planning phase. These project benefits have been detailed within the Company s petition filed in this proceeding and can be summarized as follows: Maintaining and increasing raw water supply to meet customer demands; Reduction in property taxes, costs, and other O&M expenses; Improved water quality; and, Maintaining and upgrading, where reasonable and necessary, safe and reliable service to customers. Staff issued twenty-five (25) comprehensive information requests to the Company, which NYAW answered. A Notice of Impending Settlement Negotiations was filed on March 16, On that same day, NYAW filed an amendment to its original petition in this proceeding. This amendment updated the list of projects proposed for recovery under the SIC, as well as estimated project completion times and costs. The updated list included the proposed addition of three portable iron filtration units that would be initially utilized in areas of the Company s service territory where recurring concerns about discolored water that results from high iron content in the groundwater have been raised, notably in Malverne, Roosevelt and Lakeview. NYAW and Staff held settlement discussions via teleconference on April 2, 6, 7, and May 13, This Joint Proposal formalizes the agreement reached on May 13, Attached to this Joint Proposal are the tariff leaves applicable to the projects requested for inclusion

5 This Joint Proposal is the product of the active parties settlement negotiations and was developed pursuant to, and in accordance with, the Commission s settlement procedures. The Signatory Parties believe that this Joint Proposal represents a fair and reasonable resolution of the issues presented in this proceeding. A. Overall Framework II. PROVISIONS OF THE JOINT PROPOSAL The terms and conditions of this Joint Proposal, which modifies the Rate Plan in Rate Years Four and Five, are set forth below and in the attached Appendices. Specifically, this Joint Proposal addresses the following topics: 1. Effective Date and Term; 2. Revenue Requirement, Earnings Sharing (for Merrick, Lynbrook and Sea Cliff districts), and Other Cost Recovery Mechanisms; 3. Property Tax Deferral Mechanism for the Lynbrook rate district; 4. System Improvement Charge (SIC) Mechanism; and 5. Miscellaneous Provisions B. Specific Provisions 1. Effective Date The proposed effective date of this Joint Proposal is April 1, 2015 ( Effective Date ). Rate Year Four and Rate Year Five, collectively, are designated the Rate Years

6 2. Revenue Requirement, Excess Earnings Calculation and Other Cost Recovery Mechanisms 2.1 Rate Year Four and Five Revenue Requirements for Lynbrook District SIC Projects proposed within this proceeding. The revenue requirement calculations for the SIC projects proposed per this case are based on the following parameters and modifications to the Company s current Rate Plan as detailed in the Rate Order: (a). A change in the pre-tax Rate of Return (ROR) for rate making purposes from percent to 9.57 percent. (b). A change in the allowed return on equity ( ROE ) from 9.65 percent to 9.0 percent; and (c). A change in the common equity ratio of the Company s capital structure for ratemaking purposes to 47 percent. 2.2 Earnings Sharing Mechanism Within 90 days following the end of Rate Year Four and Rate Year Five, NYAW, for the Lynbrook, Merrick and Sea Cliff rate districts, will prepare and file with the Commission a computation of the ROE for the preceding rate year based on the manner rates were set in the existing Rate Order (i.e. the rate base method). For purposes of performing the earnings sharing mechanism calculation, in measuring earnings for each rate district in each rate year, the lower of the allowed or actual debt cost rates, and the equity ratio of the lower of 47% or the actual equity ratio will be used. The capital structure components and rate base will be determined by averaging the quarterly balances (June, September, December, and March) over the applicable rate year. NYAW will utilize the following - 5 -

7 parameters for this earnings sharing mechanism computation for each of the Lynbrook, Merrick and Sea Cliff rate districts: (a). No change in base delivery rates; (b). A change in the allowed return on equity ( ROE ) from 9.65 percent to 9.0 percent; (c). A change in the pre-tax Rate of Return (ROR) for rate making purposes from percent to 9.57 percent. (d). A change in the common equity ratio of the Company s capital structure for ratemaking purposes from the lower of 47 percent or actual equity ratio. At the end of Rate Year Five, NYAW will share with its customers its cumulative (over Rate Years Four and Five) excess earnings on its common equity return in accordance with the table below. The customers share of the excess earnings will be passed back to customers through each of the districts Revenue and Property Tax Reconciliation Mechanisms as set forth in the Earnings Sharing Table, below: Earnings Sharing Table for RY4 and RY5 Allowed Rate of Return on Equity 9.0% District Retains 100% >9.0% 9.5% District Shares 50%/50% (customer/company) >9.5% 10.0% District Shares 90%/10% (customer/company) >10.0% Earnings for periods beyond Rate Year Five will be measured and, if necessary, shared on an annual basis and will be prorated for any partial year

8 3. Property Tax Deferral Mechanism 3.1 Property Tax Deferral The Signatories agree that NYAW should be permitted to utilize deferred accounting during the Rate Years established by this Joint Proposal, should the Company experience abnormally high property tax increases for the Lynbrook District. For purposes of this Joint Proposal, abnormally high property tax increases are defined as an annual increase of 8 percent or greater. 3.2 Property Tax Deferral Mechanism The computation of property tax expense subject to deferred accounting for the Rate Years is shown in Table 1, below: Table 1 Property Tax RY 3 16,946,607 RY 3 Benchmark 12,390,893 Actual Growth 8% Property Tax RY 4 18,302,336 Share 90/10 between $12.4 million and $18.3 million - defer for later recovery 100% over $18.3 million Growth 8% Property Tax RY 5 19,766,522 Share 90/10 between $12.4 million and $19.8 million - defer for later recovery 100% over $19.8 million If a property tax deferral is incurred, it will earn interest at the Other Customer Capital rate, net of tax

9 4. System Improvement Charge (SIC) Mechanism 4.1 Current SIC Mechanism The SIC mechanism approved for the Phase 2 Commons Suction Well Rehabilitation ($525,000) will remain eligible for SIC recovery under the terms of the SIC tariff approved by the Commission in the Rate Order. 4.2 Proposed SIC Projects The use of the proposed SIC mechanism will be for the following six additional projects (per Exhibit 2 of the Company s updated petition) totaling $ million of plant additions: a. System Wide Well Replacement necessary to maintain production capacity and to ensure that customer demands are reliably met during peak demand periods - $600,000; b. New Well 20-2, Valley Stream, necessary to replace well 14-1 which has been decommissioned; will preserve peak production capacities, improve fire flows and contribute to meeting year-round demand - $1,300,000; c. New Merrick Office Building will result in reduced, overall revenue requirement because of reduced O&M, better energy efficiency, and lower property taxes - $4,300,000; d. Caustic Conversion Program will result in a safer, more efficient and consistent means of maintaining ph control; also increases worker safety - $1,575,000; e. Plant 11, South Tank Roof Replacement, necessary to maintain continued safety and reliability of raw water supply - $2,100,000; - 8 -

10 f. Portable Iron Filtration Plants (3), necessary to manage discolored water concerns in conjunction with upcoming iron filtration plant construction in the Malverne, Roosevelt, and Lakeview areas - $3,300, SIC Mechanism NYAW will be permitted to continue the SIC surcharge to collect the carrying costs on the agreed to proposed SIC projects, including prior approved projects. The Company will be permitted to collect carrying costs via a SIC surcharge not to exceed 2.5 percent of operating revenues capped for the agreed capital projects. Operating Revenue used to calculate the 2.5% cap are $56,390,000, as measured by the taking total aggregated revenues of Rate Year Three established in the Rate Plan, plus SIC revenues for any projects already approved and being collected by the SIC mechanism from the Effective date. The SIC mechanism calculation and filing procedures will remain unchanged, with the exception of the Pre-tax Rate of Return. The calculation of surcharge and the process to be utilized for implementation of surcharge will be as follows: SIC Surcharge = [(NRB x Pre-tax ROR) + D] / AR; Where: NRB = the cost of the specific capital investments, net of associated (1) retirements, (2) ADIT and (3) associated accumulated depreciation reserve Pre-tax ROR = 9.57% (The details of the calculation are attached in Appendix B) D = the annual depreciation expense on the net additions AR = NYAW projected annual metered revenues - 9 -

11 5. Other Provisions 5.1 Submission To The Commission The Signatory Parties agree to request that the Commission adopt the terms of this Joint Proposal without modification. The Signatory Parties intend that this Joint Proposal will be adopted by the Commission as being in the public interest and agree individually to advocate its adoption by the Commission in its entirety and to act so as to expedite that result. 5.2 Conditioned On Commission Adoption/No Severability Each provision of this Joint Proposal is in consideration and support of all other provisions, and the Signatory Parties agreement with each provision is expressly conditioned upon the acceptance of the Joint Proposal in its entirety by the Commission. In the event or to the extent that the Commission does not adopt this Joint Proposal in its entirety, the Signatory Parties will be free to pursue their respective positions in this proceeding and any remedies at law or in equity without prejudice. 5.3 Application of Agreement/No Precedent The provisions of this Joint Proposal apply solely to and are binding only in the context of this Joint Proposal and this proceeding. None of the terms of this Joint Proposal and none of the positions taken by any Signatory Party with respect to this Joint Proposal may be referred to, cited by or relied upon by anyone in any manner as precedent or otherwise in any other proceeding before the Commission or any other regulatory

12 body or before any court of law for any purpose other than the adoption, implementation, furtherance or extension of this Joint Proposal. 5.4 Extension Nothing in this Joint Proposal will be construed as precluding the active parties from convening additional conferences and from reaching agreement to extend this Joint Proposal on mutually acceptable terms and from presenting an agreement concerning such extension to the Commission for its approval. 5.5 Continuation Except as modified herein, the provisions of the Company s current Rate Plan will continue until modified by the Commission. Consistent with the current Rate Plan, all provisions of this Joint Proposal will continue until changed by Order of the Commission. Except where this Joint Proposal specifically provides otherwise, any targets, goals, deferral thresholds, performance metrics or other similar items set forth in this Joint Proposal for Rate Year Five will continue beyond Rate Year Five until modified by the Commission. In the event of any conflict between this Joint Proposal and any other document addressing the same subject matter, this Joint Proposal will control. 5.6 Commission Authority Nothing in this Joint Proposal will be construed to limit the Commission s authority to reduce the Company s water delivery rates should it determine, in accordance with the Public Service Law, that the established rates are in excess of just and reasonable rates or are inadequate for the

13 provision of safe, reliable and adequate service. Nothing in this Joint Proposal will be construed to limit the Commission s authority to address the Company s customer service, reliability and/or any measures in accordance with the Public Service Law. 5.7 Counterparts This Joint Proposal is being executed in counterpart originals and will be binding on each Signatory Party when the counterparts have been executed. Accordingly, the Signatories agree to cooperate with each other in good faith in taking such actions. Given these facts, Staff and NYAW believe the terms of the Joint Proposal are consistent with the Commission s guidelines and are in the public interest and should be adopted by the Commission. Signature Pages Follow

14 NEW YORK AMERICAN WATER COMPANY, INC. William Date: 5/z o //~ I STATE OF NEW YORK DEPARTMENT OF PUBLIC SERVICE

15 Appendix A

16 Appendix A PSC No. 1 - WATER STATEMENT TYPE: SIC COMPANY: NEW YORK AMERICAN WATER COMPANY, INC. STATEMENT NO: 5 INITIAL EFFECTIVE DATE: Issued in compliance with order in Case 14-W-0489 dated GENERAL INFORMATION SYSTEM IMPROVEMENT CHARGE (SIC) The SIC mechanism will apply to costs associated with the construction of specific reviewed and approved projects. The mechanism will allow recovery of carrying costs (i.e., return and depreciation expense) on specific projects placed in service in Rate Year Two, Rate Year Three and beyond. Under Case 11-W-0200, the use of the SIC mechanism is approved for the following projects: Iron removal facilities at Plant 15 Storage tank rehabilitation at Plant 13 Plant 5 common suction well rehabilitation, Phase 2 and Business transformation EAM/CIS The formula for the calculation of the SIC surcharge for projects approved under Case 11-W is as follows: SIC surcharge = ((NRB x Pre-tax ROR) + D) / AR Where: NRB = the cost of the specific approved facilities listed above, net of associated (1) retirements, including cost of removal and any related tax benefits, (2) ADIT and (3) accumulated depreciation reserve Pre-tax ROR = 10.14% D = the annual depreciation expense on the net additions AR = NYAW s projected annual metered revenues. Under Case 14-W-0489, the use of the SIC mechanism is approved for the following projects: System Wide Well Replacement New Well 20-2, Valley Stream New Merrick Office Building Caustic Conversion Program Plant 11 South Tank Roof Replacement Portable Iron Filtration Plants Issued by: William M. Varley, President, 60 Brooklyn Avenue, Merrick, NY

17 Appendix A PSC No. 1 - WATER STATEMENT TYPE: SIC COMPANY: NEW YORK AMERICAN WATER COMPANY, INC. STATEMENT NO: 5 INITIAL EFFECTIVE DATE: Issued in compliance with order in Case 14-W-0489 dated GENERAL INFORMATION SYSTEM IMPROVEMENT CHARGE (SIC) (cont d.) The formula for the calculation of the SIC surcharge for projects approved under Case 14-W is as follows: SIC surcharge = ((NRB x Pre-tax ROR) + D) / AR Where: NRB = the cost of the specific approved facilities listed above, net of associated (1) retirements, including cost of removal and any related tax benefits, (2) ADIT and (3) accumulated depreciation reserve Pre-tax ROR = 9.57% D = the annual depreciation expense on the net additions AR = NYAW s projected annual metered revenues. Effective with this statement, the SIC surcharge is %. System Improvement Charge When the Company has incurred actual expenditures for projects listed above and the new facilities have been placed in service, then the amount of those expenditures (net of the associated (1) retirements, including cost of removal and any related tax benefits, (2) accumulated deferred income taxes ( ADIT ), and (3) accumulated depreciation reserve, i.e., the net rate base [ NRB ]) will constitute the incremental rate base investment subject to the SIC. The SIC filing will be made within 30 days after the project has been placed into service. The Company will provide Staff with detailed project information regarding the SIC (such as in-service dates, actual expenditures incurred, retirements, etc.). Staff will have 60 days to analyze and verify such data. Issued by: William M. Varley, President, 60 Brooklyn Avenue, Merrick, NY

18 Appendix A PSC No. 1 - WATER STATEMENT TYPE: SIC COMPANY: NEW YORK AMERICAN WATER COMPANY, INC. STATEMENT NO: 5 INITIAL EFFECTIVE DATE: Issued in compliance with order in Case 14-W-0489 dated Safeguards GENERAL INFORMATION SYSTEM IMPROVEMENT CHARGE (SIC) (cont d.) A reconciliation between authorized collections and actual collections related to the SIC surcharge will be conducted annually and filed with the Secretary to the Commission within 60 days of the end of each rate year. Any under collections or over collections will accrue interest at the customer deposit interest rate established by the Commission each year. Adjustments of under collections and over collections, as well as updates related to accumulated depreciation reserve, will be reflected in the next SIC surcharge filing. NYAW will be permitted to collect carrying costs via a SIC surcharge not to exceed 2.5% of operating revenues capped for the approved capital projects. Issued by: William M. Varley, President, 60 Brooklyn Avenue, Merrick, NY

19 Appendix B New York American Water System Improvement Charge Filing Case 14 W 0489 Pre Tax Rate of Return Calculation COST RATES WTD COST RATES RATIO Pre 39.70% LONG-TERM DEBT 52.22% 4.79% 2.50% 2.50% PREFERRED STOCK 0.78% 4.50% 0.04% 0.06% SUB TOTAL 2.54% 2.56% COMMON EQUITY 47.00% 9.00% 4.230% 7.01% TOTAL CAPITALIZATION % 6.77% 9.57%

STATE OF NEW YORK PUBLIC SERVICE COMMISSION

COMMISSIONERS PRESENT: John B. Rhodes, Chair Gregg C. Sayre Diane X. Burman James S. Alesi STATE OF NEW YORK PUBLIC SERVICE COMMISSION At a session of the Public Service Commission held in the City of