Monterey Peninsula Water Supply Project
Cost/Financial Workshop
December 13, 2012
CPUC Cost Workshop
Financial Modeling
Utility Rate Base Financing
Wednesday, December 12: 1:00 p.m. to 5:00 p.m.
2
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
(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&P
and Moody’s recently raised their outlook for AW debt, which could result in lower future debt costs
3
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 $100M
through a surcharge on customers’ bills
• We will use $15M - $20M of our short-term credit
capacity to extend the period between draws and limit
interest expense during construction
• The surcharge and SRF amounts are exempt from
real property taxes, at an annual savings of $2.5M
4
Capital & Financing Summary For Desal Plant
Capital Cost Financing
9.0 MGD (10,200 AFY)
Equity
33%
Surcharge
38%
Long-Term
Debt
29%
SRF
No SRF
Desal Plant Capital Cost
$260M¹
$260M¹
Weighted Average Cost of
Financing (w/contributions)
4.00%
4.73%
1st Year Revenue
Requirement²
$30.7M
$33.3M
5.4 MGD (5,500 AFY) w/ 3,500 AFY GWR
Equity
28%
Surcharge
47%
Long-Term
Debt
25%
SRF
No SRF
Desal Plant Capital Cost
$213M
$213M
Weighted Average Cost of
Financing (w/contributions)
3.46%
4.09%
1st Year Revenue Requirement²
$21.6M
$23.3M
Purchased GWR Annual Cost³
$8.7M
$8.7M
1st Year Total Revenue
Requirement²
$30.3M
$32.1M
¹ As compared to approved WPA equivalent of $277.5M ($297.5 original RDP cost, minus $6M maintenance reserve and $14M pre-effective costs)
² Includes Desal Plant only. The CAW in-service area facilities Revenue Requirement is estimated at an additional $13.2M with SRF
³ Based on assumed cost of $2,500/AFY
5
Sources & Uses of Cash
5.4 MGD Plant – SRF Financing
$ M illions
**** Construction Period ****
2013
2014
2015
2016
Total
Uses of Cash
Capital Spending
Cost of Financing
Total Uses of Cash
$11.9
0.0
$11.9
$27.5
0.1
$27.5
$50.0
0.0
$50.0
$123.6
5.8
$129.4
$213.0
5.9
$218.9
Sources of Cash
Contributions
Net Short Term Debt
Net Long Term Debt
Net Equity
Total Sources of Cash
7.5
4.4
0.0
0.0
$11.9
27.0
0.5
0.0
0.0
$27.5
31.8
15.1
1.5
1.7
$50.0
32.8
(20.0)
54.7
61.9
$129.4
99.1
0.0
56.2
63.6
$218.9
Based on the latest procedural schedule the dates would shift out six months later but the dollar impact would remain the same.
6
Sources & Uses of Cash
9.0 MGD Plant – SRF Financing
$ M illions
**** Construction Period ****
2013
2014
2015
2016
Total
Uses of Cash
Capital Spending
Cost of Financing
Total Uses of Cash
$13.1
0.0
$13.1
$32.9
0.1
$33.0
$61.5
0.3
$61.8
$152.5
9.1
$161.5
$260.0
9.5
$269.5
Sources of Cash
Contributions
Net Short Term Debt
Net Long Term Debt
Net Equity
Total Sources of Cash
7.5
5.6
0.0
0.0
$13.1
27.0
6.0
0.0
0.0
$33.0
31.8
8.4
10.1
11.4
$61.8
32.8
(20.0)
69.8
79.0
$161.5
99.1
0.0
79.9
90.4
$269.5
Based on the latest procedural schedule the dates would shift out six months later but the dollar impact would remain the same.
7
Annual Customer Surcharge
$ Millions
Surcharge
Months of Surcharge
Surcharge as % of Rev Req
2H 2013 1H 2014 2H 2014
$7.5
$11.6
$15.5
2015
$31.8
2016
$32.8
6
6
6
12
12
30.0%
45.0%
60.0%
60.0%
60.0%
Total
$99.1
Based on the latest procedural schedule the dates would shift out six months later but the dollar impact would remain the same.
8
Projected Impact to Monterey Water Bills
$ Increase
Related to
Water Supply
Project
Project
Usage (ccf)
2012 Current
Monthly Bill
2017 Projected
Monthly Bill
with SRF
25th Percentile Bill
3
$26.56
$45.03
$18.47
50th Percentile Bill
5
$37.77
$62.79
$25.02
Average Bill
6
$47.81
$78.02
$30.21
75th Percentile Bill
8
$65.30
$105.45
$40.15
95th Percentile Bill
16
$245.93
$390.56
$144.63
Average Commercial Bill
62
$602.04
$932.36
$330.32
Assumptions:
• Usage = 1ccf = 100 cubic feet = 748 gallons
• Data to determine Percentile Bill usage is from May 2011 consumption data
• Proposed 2017 bill includes multiple estimates
• Current bills calculated based on approved tariff rates and surcharges as of December 7, 2012
9
CPUC Cost Workshop
Financial Modeling
Discuss Compliance Filing and
Present Financial Model
Wednesday, December 12: 1:00 p.m. to 5:00 p.m.
Thursday, December 13: 9:30 a.m. to 12:30 p.m.
10
Development & Submission of Financial Model
•
•
•
•
•
CAW began developing the current model in February 2012
Main objective was to create a framework for evaluating alternatives that
could be easily updated as cost estimates & other assumptions change and
to allow for different capital and financing scenarios
This model was used for the application filed by CAW in April 2012
During the Fall of 2012, CAW worked jointly with representatives from DRA
and MPWMD on further development of the model
CAW made the following changes to the financial model based on
discussions with DRA and MPWMD:





•
Consolidated key assumptions into one user page
Created high-level summary output for users
Identified O&M expenses as either fixed or variable and added an input to allow plant
production at less than 100% capacity
Added functionality to allow for a contribution to construction costs from an outside
public agency
Provided a third financing scenario to allow for a combination of SRF debt and CAW
debt
On 11/15/12, CAW submitted the financial model to the CPUC and all parties
to be used to compute various revenue requirement scenarios
11
Financial Model Inputs - Plant
Plant Assumptions
Plant Size (MGD)
Capital Scenario
vs. Most Probable Capital Scenario
Include CAW-Only Facilities?
Mobilization/Demobilization
Engineering/Startup
Implementation
Elec, Inst & Control Systems
Contingency
Mitigation Allowance
Exclude Test Well?
Ground Water Recharge
Annual AF
Cost per AF ($)
9.0
High End
+25.0%
No
2.0%
15.0%
20.0%
40.0%
25.0%
1.0%
Yes
0
$0
12
Financial Model Inputs - Financing
Financing Assumptions
Cost of Capital
Cost of Equity
Cost of Debt
Equity %
Debt %
9.99%
5.00%
53.00%
47.00%
Cost of Capital
7.64%
Other Debt Rates
Short Term Debt Rate
Short Term Debt Cap ($MM)
SRF Debt Rate
SRF Term (yrs)
SRF Assets Exempt from Prop Tax?
1.00%
$20.0
2.50%
20
Yes
CAW Financing Scenario
% of CAW Cap Structure as SRF? (Max = 47.0%)
SRF Borrowings ($MM)
3 - CAW Equity & Debt / SRF
47.0%
$77.2
13
Financial Modeling Inputs – Surcharge & Contributions
Surcharge & Contribution Assumptions
Utilize a Surcharge?
Period
Period 1
Period 2
Period 3
Period 4
Period 5
Period 6
Period 7
Public Agency Contribution
Contribution Amount ($MM)
Contribution Date
Financing Rate
Financing Term
Yes
% of Mont Revenue Req
30.0%
45.0%
60.0%
60.0%
60.0%
60.0%
60.0%
Start Date
07/01/13
01/01/14
07/01/14
01/01/15
07/01/15
01/01/16
07/01/16
End Date
12/31/13
06/30/14
12/31/14
06/30/15
12/31/15
06/30/16
12/31/16
$0.0
Jan-14
2.5%
20
14
Project Summary Output
Project Summary ($MM) - cont.
Project Summary ($MM)
Capital Investment
Desal Plant
CAW-Only Facilities
AFUDC
Total Project Cost
CAW Rate Base at Year End 2017
Utility Plant *
SRF Funded Costs *
Surcharge Funded Costs *
Pub Agency Funded Costs
Deferred Taxes
Total CAW Rate Base
* Net of depreciation & amortization
$254.7
0.0
11.0
$265.7
$259.1
(79.2)
(101.7)
0.0
(1.2)
$77.0
Total Cost to Customer
CAW Pre-Tax Equity Cost
CAW Pre-Tax Debt Cost
Depreciation & Amortization
General Taxes
Fixed O&M
Variable O&M
Year 1 CAW Rev Req ($MM)
Customer SRF Surcharge
Public Agency Costs
Total Yr 1 Cost to Customer
$13.0
0.0
2.1
0.9
2.8
6.9
$25.7
5.0
0.0
$30.7
Fixed Cost per AF
Variable Cost per AF
Total Cost per AF
$2,353
$689
$3,042
CAW Captial Structure
CAW Equity
CAW Debt
SRF Debt
Total
53.0%
0.0%
47.0%
100.0%
15
CPUC Cost Workshop
Financial Modeling
Run 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.
16
Appendix
17
California American In-service Area Facilities
CAW In-service Area Facilities
SRF
No SRF
Capital Cost
$107M¹
$107M¹
Weighted Average Cost of
Financing 2
6.47%
7.64%
1st Year Revenue Requirement²
$13.2M
$15.1M
¹ Does not include AFUDC
² Does not include any customer surcharge
18
Capital & Financing Summary For Desal Plant – No Surcharge
9.0 MGD (10,200 AFY)
SRF
No SRF
Desal Plant Capital Cost
$260M¹
$260M¹
Weighted Average Cost of
Financing
6.47%
7.64%
1st Year Revenue
Requirement²
$42.8M
$48.1M
5.4 MGD (5,500 AFY) w/ 3,500 AFY GWR
SRF
No SRF
Desal Plant Capital Cost
$213M
$213M
Weighted Average Cost of
Financing
6.47%
7.64%
1st Year Revenue Requirement²
$34.1M
$38.5M
Purchased GWR Annual Cost³
$7.2M
$7.2M
1st Year Total Revenue
Requirement²
$41.3M
$45.7M
¹ As compared to approved WPA equivalent of $277.5M ($297.5 original RDP cost, minus $6M maintenance reserve and $14M pre-effective costs)
² Includes Desal Plant only. The CAW In-service Area Facilities Revenue Requirement is estimated at an additional $13.2M with SRF
³ Based on assumed cost of $2,500/AFY
19
Projected Impact to Monterey Water Bills (no surcharge #2)
$ Increase
Related to
Water Supply
Project
Project
Usage (ccf)
2012 Current
Monthly Bill
2017 Projected
Monthly Bill
with SRF
25th Percentile Bill
3
$26.56
$51.00
$24.44
50th Percentile Bill
5
$37.77
$70.01
$32.23
Average Bill
6
$47.81
$86.97
$39.17
75th Percentile Bill
8
$65.30
$117.47
$52.17
95th Percentile Bill
16
$245.93
$423.25
$189.32
Average Commercial Bill
62
$602.04
$1,038.63
$436.59
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
20
Capital Financing Considerations #1
MPWMD Consideration
If available, State Revolving Fund (SRF)
loans should be maximized and
considered for up to 100% of the project
funding to reduce costs to Peninsula
ratepayers.
CALIFORNIA AMERICAN WATER
Response
CAW’s financing plan relies on SRF loans
to fund the long-term debt portion of the
utility investment. CAW cannot support
MPWMD’s proposal that limits equity
financing to less than 53%, which is
CAW’s current authorized equity ratio
from its most recent Cost of Capital
decision (D.12-07-009).
Financing 100% with debt is not possible
without imparting significant financial
harm and risk on equity holders as a
result of this project.
Without equity infusion, CAW could be out
of compliance with its current indenture
requirements.
21
Capital Financing Considerations #2
MPWMD Consideration
CALIFORNIA AMERICAN WATER
Response
If SRF loans are not available for the
entire project, then require CAW to
examine tax-exempt “private activity” debt
as a funding source for both the debt
component, but preferably additionally in
lieu of equity.
If SRF funds are not available, CAW will
examine the taxable and tax-exempt debt
markets at the time of financing. If taxexempt bonds carry a lower interest rate,
CAW will issue tax-exempt debt to the
extent it is available. CAW cannot support
a proposal that limits equity financing to
less than its current authorized level. See
response 1 for indenture requirement and
risk issues.
22
Capital Financing Considerations #3
MPWMD Consideration
CALIFORNIA AMERICAN WATER
Response
Consider a public agency (i.e. MPWMD)
contribution in lieu of CAW debt or equity
to reduce costs to peninsula ratepayers.
The contribution would be made via
public debt and the source of repayment
either a surcharge on the CAW bill or
direct fees and charges to property
owners in the District established with
Proposition 218 process.
CAW has proposed implementation of
Surcharge 2 to fund $99.1 million of the
project construction. Depending upon the
plant size, this represents between 37%
and 45% of the total MPWSP investment.
CAW’s financing plan is a balanced
proposal that provides significant benefits
to customers, while preserving the
financial integrity of the utility. The
MPWMD proposal would limit CAW’s
equity investment and add significant risk
to equity holder. CAW has agreed to
further discuss this issue with MPWMD.
23
Capital Financing Considerations #4
MPWMD Consideration
CALIFORNIA AMERICAN WATER
Response
Even in the event of a CAW borrowing, the
District should offer and the CPUC should
accept the District’s potential public credit
“backstop” to enhance the CAW
borrowing credit rating and reduce costs
to Peninsula ratepayers. The District
offers to substitute its public credit as a
backstop to CAW’s credit worthiness in
order to reduce the cost of CAW’s debt. It
is anticipated that CAW’s parent
obligation carries a credit rating of Baa2,
but the District could raise it to perhaps
A1. this might require the use of a “standby water purchase agreement,” a “rate
covenant,” and other standing
commitments.
American Water Treasurer, Bill Rogers,
CAW President, Rob MacLean, CAW VicePresident of Finance, Jeff Linam and
MPWMD General Manager, David Stoldt
met at CAW’s offices on September 26th
and discussed the District’s backstop
proposal. CAW believes that more
discussion is needed to determine
whether this proposal would provide
benefits to customers. Further, Moody’s
and Standard & Poor’s recently changed
the outlook of American Water Capital
Corporation debt to positive.
24
Capital Financing Considerations #5
MPWMD Consideration
CALIFORNIA AMERICAN WATER
Response
In all cases, the CPUC should require – at
that point in the future when permanent
financing is considered – that the then –
current market conditions be considered
and, if warranted, the public participation
in financing as outlined above be
required.
CAW has proposed that in the case of SRF
or long term debt, financing should be
based on the current market conditions.
The Commission cannot speculate on
future conditions. The Commission
should only be obligated to review in
future proceedings the actions taken by
CAW and not hold control over future
actions.
25
Capital Financing Considerations #6
MPWMD Consideration
If it turns out that State Revolving Funds
require a public partner, as it normally
would in most cases, the District offers to
serve in that role.
CALIFORNIA AMERICAN WATER
Response
If required, CAW would consider an
appropriate public partner.
26