United Water Pennsylvania, Inc

UNITED WATER PENNSYLVANIA, INC. 2013 MANAGEMENT EFFICIENCY INVESTIGATION

IMPLEMENTATION PLAN FOR STAFF’S JULY 2013 FOLLOW-UP RECCOMENDATIONS

Submitted September 13, 2013 UNITED WATER PENNSYLVANIA, INC. 2013 MANAGEMENT EFFICIENCY INVESTIGATION IMPLEMENTATION PLAN FOR STAFF’S JULY 2013 FOLLOW-UP RECCOMENDATIONS

III. FINANCIAL MANAGEMENT

RECOMMENDATION III-1:Submit a detailed, written explanation for the 2012 dividend payment that was in excess of 85% of net income to its parent company, and provide advanced notice to the Commission prior to making any future dividend payments in excess of 85% of net income.

UWPA POSITION: Accepted

INDIVIDUAL RESP: Michael Algranati, VP, Treasurer and Procurement Officer

Our understanding of this recommendation is that Commission staff has adopted a dividend guideline for all major jurisdictional utility companies in PA to inform the Commission of dividend payouts that exceed 85% of net income. The intent of this recommendation is not for UWPA to modify or change their dividend policy but only to provide the Commission with information regarding any dividend payouts that will exceed 85% of net income. However for UWPA the 85% benchmark may not be a good indicator as UWW’s policy for dividends/equity infusions from and to its subsidiaries is based on each subsidiary’s net cash flow which is equal to revenue - operating expenses +/- working capital - capital expenditures not net income. The intent of the dividend approach is to keep each subsidiary’s interest expense allocation in line with its capitalization. When subsidiaries invest more capital and have negative cash flow, their percentage of the interest allocation increases when subsidiaries have positive cash flow their percentage of the interest allocation decreases. If UWW limited dividends, then a subsidiary may end up paying a higher interest percentage than would otherwise be warranted.

A 2012 report will be submitted and in the future we will submit as soon as possible any dividends over 85% once the report is completed.

of 14 UNITED WATER PENNSYLVANIA, INC. 2013 MANAGEMENT EFFICIENCY INVESTIGATION IMPLEMENTATION PLAN FOR STAFF’S JULY 2013 FOLLOW-UP RECCOMENDATIONS

V. WATER OPERATIONS

RECOMMENDATION V-1:Continue efforts to reduce UFW to or below Commission guidelines of 20%.

INDIVIDUAL RESP: Steve Metzler, Sr. Engineer

NRW REDUCTION PLAN GOALS

UWPA’s strategy is to establish a series of increasing higher levels of performance in meeting NRW goals. These goals were separated into three milestone categories as to be measureable.

SHORT TERM GOALS - The short term goals (1-2 Years) are focused on reducing UWPA’s Total Real Losses’ UFW component to less than 20% and lower the NRW ILI index to less than 5.0.

MEDIUM TERM GOALS - The medium term goals (3-5 Years) are focused on reducing UWPA’s Total Real Losses’ UFW component to less than 15% and lower the NRW ILI index to less than 4.0.

LONG TERM GOALS - The long term goals (5+ Years) are focused on reducing UWPA’s NRW to less than 20% and maintaining an ILI below 4.0.

NRW REDUCTION PLAN SUPPORTING OBJECTIVES

The plan for achieving UWPA’s short- and medium-term goals is to focus on minimizing water losses in each of UWPA’s water systems and increasing the quantity of billed water. The objectives to achieve these goals include:

REDUCE NRW TO 32% BY DECEMBER 31, 2013

 Improve our efficiency and effectiveness of identifying areas and pinpoint leaks o Purchase additional equipment – June 1, 2013 o Establish one additional leak detection technician position – June 1, 2013 o Purchase two vans that enable our technicians to better perform these tasks. – June 1, 2013

 Continue to develop our fire service initiative

o Utilize enabling technology such as insertion meters to future develop a best practice approach. – July 31, 2013 o Provide language to our tariff to improve control over fire services. – October 31, 2013 o Meet with at least two fire departments to develop a best practice model of communications– December 31, 2013

 Work with engineering to get a bulk water sales station installed – December 31, 2013

 Support the deployment of additional AMI technology and utilize the data to improve NRW – December 31, 2013

 Continue to develop DMA’s, conduct leak surveys, have regular meetings with all functional areas, and meet with accounting and customer service to be sure we are aligned with our efforts. – December 31, 2013

Anticipated Completion Date: December, 2013

V. WATER OPERATIONS

RECOMMENDATION V-2:Accelerate the main replacement program to align with long term main replacement rates of approximately 100 to 120 years.

INDIVIDUAL RESP: Art Saunders, Sr. Project Engineer

UWPA is continuing to work towards the recommended 100 to 120 year water main replacement program.

Anticipated Completion Date: Ongoing

V. WATER OPERATIONS

RECOMMENDATION V-3:Deploy a more proactive main replacement program in Pennsylvania.

INDIVIDUAL RESP: Art Saunders, Sr. Project Engineer

UWNJ is continuing to evaluate its proactive water main program. There have been several functions of the program that have not performed as planned. When the issues have been resolved the program will be rolled out to UWPA. UWPA will continue to replace water main as identified by the current methods until the new program is rolled out.

V. EMERGENCY PREPAREDNESS

RECOMMENDATION VI-1:Strive to ensure all Chapter 101 plans and procedures are up-to-date, site specific and inclusive.

INDIVIDUAL RESP: Kim McConnell, Administration Coordinator

The Chapter 101 Emergency Response Plans are updated twice a year, typically in January and July. The most recent update was updated in July of 2013.

VII. MATERIALS MANAGEMENT

RECOMMENDATION VII-1:Strive to improve inventory accuracy and implement a cycle counting procedure.

INDIVIDUAL RESP: Michael Watkin, Finance Manager

United Water’s corporate materials management group is in the final testing stage to determine if United Water can break out its inventory by each separate location. We should know by the end of August 2013 if the People Soft (PS) system can accomplish this new task. If the inventory can be broken out by location in PS, United Water PA will conduct a full inventory count in September 2013 and separate the inventory by location. We will then have another full inventory count in December 2013 to gage the accuracy by location.

If for some reason we can’t break out the inventory by location, we will conduct a cycle count on our top 25 high volume and high cost items by the end of the September 2013 followed up by a full inventory count in December 2013 and compare for accuracy.

In addition to the activities this year, United Water PA will implement a cycle counting system in 2014 where the field will count the items classified as Cycle A items three times per year (see definition above), Cycle B and Cycle C items will be counted twice per year.

The field will work with the Accounting Representative with regards to the timing and the recording of the count in PS.

RECOMMENDATION VII-2:Strive to develop an efficient way to establish and track minimum and maximum levels for inventory items.

United Water’s corporate materials management group has tested a Min/Max program with our NY Division. The United Water PA Accounting Representative will reach out to the NY Division to learn how the Min/Max program is working in PS and will train the Harrisburg T&D department on how to maintain this program.

This, of course, is predicated on the PS system being able to break out our inventory by location. If we can’t break out inventory by location, then the Harrisburg T&D department will have to go back to manually keeping track of their Min/Max levels and forwarding the monthly results to the Accounting Representative.

RECOMMENDATION VII-3:Establish designated emergency stock items and eliminate excess/ obsolete inventory.

The field, using the definition of emergency stock items identified in the Audit Report, will identify emergency stock items during the annual inventory count in December 2013 and provide a list of those items to the Accounting Representative. The Accounting Representative must determine if items deemed as emergency stock items are part of our current inventory item list, if they we will ask our corporate accounting group to move these items to an account that United Water PA currently does not use. If the items deemed as emergency stock items are not part of our current inventory item list, we will need to determine if we want to add those dollars to the balance sheet or create a separate master list. We will work with our corporate accounting group to make that determination.

During the annual inventory count in December 2013, the field will also determine which items should be deemed to be obsolete and sold as scrap metal. This was completed in the fall of 2010 and we will continue to make this as part of the annual inventory count.

RECOMMENDATION VII-4:Strive to achieve inventory turnover of at least 3.0 turns.

As discussed with the auditors, when we identify emergency stock items and scrap any obsolete items, our inventory turnover ratio will improve if we do not use those items as part of the calculation. At that point we will need to review the possibility of setting specific company goals by location to achieve the goal of 3.0 turns annually.

RECOMMENDATION VII-5:Work to enhance automation of Materials Management processes and systems, and strive to eliminate the error prone aspects of the current process.

Our corporate materials management team has been working diligently to make changes to the People Soft system to allow us to track inventory by each separate location within United Water PA. This will greatly enhance our ability to see where any errors may be occurring. Also, our corporate materials management team has been able to successfully utilize a Min/Max tracking system in PS for our NY Division.

RECOMMENDATION VII-6:Ensure the materials management function receives the managerial support and guidance to operate efficiently.

As we continue to work towards being able to track inventory by location at United Water PA, this will enable the management team to hold the field accountable for the accuracy of their inventory and the amount of inventory by location. Likewise, due to shifting roles and responsibilities, the Accounting Representative, who reports directly to the Finance Manager, will be able to closely review the duties assigned to the field in relation to the materials management program and will be able to notify the Finance Manager in a practical time frame which will allow for sufficient time for follow-up and support.

IX. DIVERSITY

RECOMMENDATION IX-1:Increase purchases from minority, women, and persons with disabilities owned business enterprises.

INDIVIDUAL RESP: Kim McConnell, Administrative Coordinator

UWPA will continue to seek out businesses owned by minorities, women, and persons with disabilities as its suppliers. In 2013 we began doing business with Flagger Force, a women owned business. We have engaged the services of Flagger Force to conduct flagging services as well as certification training for our own employees.