Cost Workshops on MPWSP (Dec2012) Presentation 3

7/30/2019 Cost Workshops on MPWSP (Dec2012) Presentation 3

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Monterey Peninsula Water Supply ProjectCost/Financial Workshop

December 13, 2012


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2

CPUC Cost Workshop

Financial Modeling

Utility Rate Base Financing

Wednesday, December 12: 1:00 p.m. to 5:00 p.m.


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Key Assumptions

Plant Size scenarios

9.0 MGD

5.4 MGD, supplemented with 3,500 AFY of GWR(1)

Financing Scenarios:

Primary Case --

SRF Debt & CAW Equity

Alternative Case

actual cost of debt & CAW Equity

Customer Surcharge totaling $99M(2)

Utilize $20M of CAW short term debt during construction

Cost of Capital:

Cost of SRF Debt 2.50%

Cost of Equity: 9.99%

53% equity / 47% debt

Cost of CAW Debt: 5.00%

market(3)

(vs. 6.63% authorized)

Property taxes avoided on plant funded with SRF and Surcharge #2

3

(1)

GWR is assumed to cost between $2,500/AF to $3,000/AF based on information provided by the MRWPCA

(2)

$99 M equals about 33% of rate base. Currently, contributions equal about 10% of rate base.(3)

Current market rate for AWK 30-year debt is approximately 4.5%, for both taxable and tax-exempt issuances. S&Pand Moodys recently raised their outlook for AW debt, which could result in lower future debt costs


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CAW Strategy to Limit Revenue Requirement

We believe the entire project, including the pipeline,qualifies for SRF loans

We have proposed a rate base offset of $100Mthrough a surcharge on customers bills

We will use $15M - $20M of our short-term creditcapacity to extend the period between draws and limitinterest expense during construction

The surcharge and SRF amounts are exempt fromreal property taxes, at an annual savings of $2.5M


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5

Capital & Financing Summary For Desal Plant

As compared to approved WPA equivalent of $277.5M ($297.5 original RDP cost, minus $6M maintenance reserve and $14M pre-effective costs)

Includes Desal Plant only. The CAW in-service area facilities Revenue Requirement is estimated at an additional $13.2M with SRF

Based on assumed cost of $2,500/AFY

9.0 MGD (10,200 AFY)

SRF No SRF

Desal Plant Capital Cost $260M $260M

Weighted Average Cost ofFinancing (w/contributions)

4.00% 4.73%

1st Year RevenueRequirement

$30.7M $33.3M

5.4 MGD (5,500 AFY) w/ 3,500 AFY GWR

SRF No SRF


Weighted Average Cost ofFinancing (w/contributions)

3.46% 4.09%


$21.6M $23.3M

Purchased GWR Annual Cost $8.7M $8.7M

1st

Year Total RevenueRequirement $30.3M $32.1M

Capital Cost Financing


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Sources & Uses of Cash

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5.4 MGD Plant SRF Financing

$ M ill ions 2013 2014 2015 2016 Total

Uses of Cash

Capital Spending $11.9 $27.5 $50.0 $123.6 $213.0

Cost of Financing 0.0 0.1 0.0 5.8 5.9Total Uses of Cash $11.9 $27.5 $50.0 $129.4 $218.9

Sources of Cash

Contributions 7.5 27.0 31.8 32.8 99.1Net Short Term Debt 4.4 0.5 15.1 (20.0) 0.0

Net Long Term Debt 0.0 0.0 1.5 54.7 56.2

Net Equity 0.0 0.0 1.7 61.9 63.6

Total Sources of Cash $11.9 $27.5 $50.0 $129.4 $218.9

**** Construction Period ****

Based on the latest procedural schedule the dates would shift out six months later but the dollar impact would remain the same.


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Sources & Uses of Cash

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9.0 MGD Plant SRF Financing

$ M ill ions 2013 2014 2015 2016 Total

Uses of Cash

Capital Spending $13.1 $32.9 $61.5 $152.5 $260.0

Cost of Financing 0.0 0.1 0.3 9.1 9.5

Total Uses of Cash $13.1 $33.0 $61.8 $161.5 $269.5

Sources of Cash

Contributions 7.5 27.0 31.8 32.8 99.1Net Short Term Debt 5.6 6.0 8.4 (20.0) 0.0

Net Long Term Debt 0.0 0.0 10.1 69.8 79.9

Net Equity 0.0 0.0 11.4 79.0 90.4

Total Sources of Cash $13.1 $33.0 $61.8 $161.5 $269.5

**** Construction Period ****



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Annual Customer Surcharge

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$ Millions 2H 2013 1H 2014 2H 2014 2015 2016 Total

Surcharge $7.5 $11.6 $15.5 $31.8 $32.8 $99.1

Months of Surcharge 6 6 6 12 12

Surcharge as % of Rev Req 30.0% 45.0% 60.0% 60.0% 60.0%



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Project Usage (ccf)2012 CurrentMonthly Bill

2017Projected

Monthly Billwith SRF

$ IncreaseRelated to

Water SupplyProject

25th Percentile Bill 3 $26.56 $45.03 $18.47


Average Bill 6 $47.81 $78.02 $30.21



Average Commercial Bill 62 $602.04 $932.36 $330.32

Assumptions: Usage = 1ccf = 100 cubic feet = 748 gallons Data to determine Percentile Bill usage is from May 2011 consumption data Proposed 2017 bill includes multiple estimates Current bills calculated based on approved tariff rates and surcharges as of December 7, 2012

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Projected Impact to Monterey Water Bills


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CPUC Cost Workshop

Financial ModelingDiscuss Compliance Filing and

Present Financial Model

Wednesday, December 12: 1:00 p.m. to 5:00 p.m.Thursday, December 13: 9:30 a.m. to 12:30 p.m.


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Development & Submission of Financial Model

CAW began developing the current model in February 2012

Main objective was to create a framework for evaluating alternatives that

could be easily updated as cost estimates & other assumptions change andto allow for different capital and financing scenarios

This model was used for the application filed by CAW in April 2012

During the Fall of 2012, CAW worked jointly with representatives from DRAand MPWMD on further development of the model

CAW made the following changes to the financial model based ondiscussions with DRA and MPWMD:

Consolidated key assumptions into one user pageCreated high-level summary output for usersIdentified O&M expenses as either fixed or variable and added an

input to allow plant

production at less than 100% capacityAdded functionality to allow for a contribution to construction costs from an outsidepublic agencyProvided a third financing scenario to allow for a combination of SRF debt and CAWdebt

On 11/15/12, CAW submitted the financial model to the CPUC and all partiesto be used to compute various revenue requirement scenarios11


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Financial Model Inputs - Plant

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PlantAssumptionsPlantSize(MGD) 9.0

Capital

Scenario High

Endvs.MostProbableCapitalScenario +25.0%

IncludeCAWOnlyFacilities? No

Mobilization/Demobilization 2.0%

Engineering/Startup 15.0%

Implementation 20.0%

Elec,Inst

&

Control

Systems 40.0%

Contingency 25.0%

MitigationAllowance 1.0%

ExcludeTestWell? Yes

GroundWaterRechargeAnnual

AF 0

CostperAF($) $0


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Financial Model Inputs - Financing

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FinancingAssumptionsCostofCapital

Cost

of

Equity 9.99%CostofDebt 5.00%

Equity% 53.00%

Debt% 47.00%

CostofCapital 7.64%

OtherDebt

Rates

ShortTermDebtRate 1.00%

ShortTermDebtCap($MM) $20.0

SRFDebtRate 2.50%

SRFTerm(yrs) 20

SRFAssets ExemptfromPropTax? Yes

CAWFinancingScenario 3 CAWEquity&Debt/SRF

%ofCAWCapStructureasSRF?(Max=47.0%) 47.0%

SRFBorrowings($MM) $77.2


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Financial Modeling Inputs Surcharge & Contributions

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Surcharge&ContributionAssumptionsUtilize

a

Surcharge? Yes

Period %ofMontRevenueReq StartDate EndDatePeriod1 30.0% 07/01/13 12/31/13

Period2 45.0% 01/01/14 06/30/14

Period3 60.0% 07/01/14 12/31/14

Period4 60.0% 01/01/15 06/30/15

Period5 60.0% 07/01/15 12/31/15

Period6 60.0% 01/01/16 06/30/16

Period7 60.0% 07/01/16 12/31/16

PublicAgencyContributionContributionAmount($MM) $0.0

ContributionDate Jan

14

FinancingRate 2.5%

FinancingTerm 20


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Project Summary Output

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ProjectSummary($MM)

CapitalInvestment

Desal Plant $254.7

CAWOnlyFacilities 0.0

AFUDC 11.0

TotalProjectCost $265.7

CAWRateBaseatYearEnd2017

UtilityPlant

* $259.1

SRFFundedCosts* (79.2)

SurchargeFundedCosts* (101.7)

PubAgencyFundedCosts 0.0

DeferredTaxes (1.2)

TotalCAWRateBase $77.0 *Netofdepreciation&amortization

ProjectSummary($MM) cont.

TotalCosttoCustomer

CAWPreTaxEquityCost $13.0

CAWPreTaxDebtCost 0.0

Depreciation&Amortization 2.1

GeneralTaxes 0.9

FixedO&M 2.8

VariableO&M 6.9

Year1

CAW

Rev

Req

($MM) $25.7

CustomerSRFSurcharge 5.0

PublicAgencyCosts 0.0

TotalYr1CosttoCustomer $30.7

FixedCostperAF $2,353VariableCostperAF $689Total

Cost

per

AF $3,042

CAWCaptialStructure

CAWEquity 53.0%

CAWDebt 0.0%

SRFDebt 47.0%

Total 100.0%


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CPUC Cost Workshop

Financial ModelingRun Financial Model for Possible Project

Scenarios

Break Out Session

Wednesday, December 12: 1:00 p.m. to 5:00 p.m.

Thursday, December 13: 9:30 a.m. to 12:30 p.m.


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Appendix


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California American In-service Area Facilities

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CAW In-service Area Facilities

SRF No SRF

Capital Cost $107M $107M

Weighted Average Cost ofFinancing 2

6.47% 7.64%

1st Year Revenue Requirement $13.2M $15.1M

Does not include AFUDC

Does not include any customer surcharge


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Capital & Financing Summary For Desal Plant No Surcharge

As compared to approved WPA equivalent of $277.5M ($297.5 original RDP cost, minus $6M maintenance reserve and $14M pre-effective costs)

Includes Desal Plant only. The CAW In-service Area Facilities Revenue Requirement is estimated at an additional $13.2M with SRF

Based on assumed cost of $2,500/AFY

9.0 MGD (10,200 AFY)

SRF No SRF


Weighted Average Cost ofFinancing

6.47% 7.64%


$42.8M $48.1M

5.4 MGD (5,500 AFY) w/ 3,500 AFY GWR

SRF No SRF


Weighted Average Cost ofFinancing 6.47% 7.64%


$34.1M $38.5M

Purchased GWR Annual Cost $7.2M $7.2M

1

st

Year Total RevenueRequirement $41.3M $45.7M


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Project Usage (ccf)2012 CurrentMonthly Bill

2017Projected

Monthly Billwith SRF

$ IncreaseRelated to

Water SupplyProject



Average Bill 6 $47.81 $86.97 $39.17



Average Commercial Bill 62 $602.04 $1,038.63 $436.59

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Projected Impact to Monterey Water Bills (no surcharge #2)

Assumptions: Usage = 1ccf = 100 cubic feet = 748 gallons Data to determine Percentile usage is from May 2011 Proposed 2017 bill includes multiple estimates Current bills calculated based on approved tariff rates and surcharges as of December 7, 2012


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Capital Financing Considerations #1MPWMD Consideration CALIFORNIA AMERICAN WATER

Response

If available, State Revolving Fund (SRF)

loans should be maximized andconsidered for up to 100% of the projectfunding to reduce costs to Peninsularatepayers.

CAWs financing plan relies on SRF loans

to fund the long-term debt portion of theutility investment. CAW cannot supportMPWMDs proposal that limits equityfinancing to less than 53%, which isCAWs current authorized equity ratiofrom its most recent Cost of Capitaldecision (D.12-07-009).

Financing 100% with debt is not possiblewithout imparting significant financialharm and risk on equity holders as aresult of this project.

Without equity infusion, CAW could be

out of compliance with its currentindenture requirements.


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Capital Financing Considerations #2MPWMD Consideration CALIFORNIA AMERICAN WATER

Response

If SRF loans are not available for the

entire project, then require CAW toexamine tax-exempt private activity debtas a funding source for both the debtcomponent, but preferably additionally inlieu of equity.

If SRF funds are not available, CAW will

examine the taxable and tax-exempt debtmarkets at the time of financing. If tax-exempt bonds carry a lower interest rate,CAW will issue tax-exempt debt to theextent it is available. CAW cannot supporta proposal that limits equity financing toless than its current authorized level. Seeresponse 1 for indenture requirement andrisk issues.


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Capital Financing Considerations #3

MPWMD Consideration CALIFORNIA AMERICAN WATERResponse

Consider a public agency (i.e. MPWMD)

contribution in lieu of CAW debt or equityto reduce costs to peninsula ratepayers.The contribution would be made viapublic debt and the source of repaymenteither a surcharge on the CAW bill ordirect fees and charges to propertyowners in the District established withProposition 218 process.

CAW has proposed implementation of

Surcharge 2 to fund $99.1 million of theproject construction. Depending upon theplant size, this represents between 37%and 45% of the total MPWSP investment.CAWs financing plan is a balancedproposal that provides significant benefitsto customers, while preserving thefinancial integrity of the utility. TheMPWMD proposal would limit CAWsequity investment and add significant riskto equity holder. CAW has agreed tofurther discuss this issue with MPWMD.


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Even in the event of a CAW borrowing, the

District should offer and the CPUC shouldaccept the Districts potential public creditbackstop to enhance the CAWborrowing credit rating and reduce coststo Peninsula ratepayers. The Districtoffers to substitute its public credit as abackstop to CAWs credit worthiness inorder to reduce the cost of CAWs debt. Itis anticipated that CAWs parentobligation carries a credit rating of Baa2,but the District could raise it to perhapsA1. this might require the use of a stand-by water purchase agreement, a ratecovenant, and other standingcommitments.

American Water Treasurer, Bill Rogers,

CAW President, Rob MacLean, CAW Vice-President of Finance, Jeff Linam andMPWMD General Manager, David Stoldtmet at CAWs offices on September 26th

and discussed the Districts backstopproposal. CAW believes that morediscussion is needed to determinewhether this proposal would providebenefits to customers. Further, Moodysand Standard & Poors recently changedthe outlook of American Water CapitalCorporation debt to positive.


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In all cases, the CPUC should require at

that point in the future when permanentfinancing is considered that the then current market conditions be consideredand, if warranted, the public participationin financing as outlined above be

required.

CAW has proposed that in the case of SRF

or long term debt, financing should bebased on the current market conditions.

The Commission cannot speculate onfuture conditions. The Commission

should only be obligated to review infuture proceedings the actions taken byCAW and not hold control over futureactions.


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If it turns out that State Revolving Funds

require a public partner, as it normallywould in most cases, the District offers toserve in that role.

If required, CAW would consider an

appropriate public partner.

Cost Workshops on MPWSP (Dec2012) Presentation 3

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