Potential Consolidation of WMWD’s Murrieta Division into EMWD April 15, 2015 Paul D. Jones II, P.E. General Manager, Eastern Municipal Water District 1

Agenda - Murrieta Division 2 Background Understanding Considerations for Potential Change in Water and Sewer Service Policy Principles for Service Transition to EMWD Conceptual Service Proposal Acquisition Balance/Financial Example Requested Action and Next Steps Purpose: EMWD was invited to submit a conceptual proposal for the consolidation of WMWD’s Murrieta Division into EMWD.

Background Understanding 3 WMWD’s Murrieta Division 6.3 Sq. Mile Service Area (includes 1 Sq. Mile of EMWD). 2,850 Water Customers. 2,220 Sewer Customers. Estimated at 60% developed land area. Western Municipal Water District Division 3. Murrieta Division Boundaries

Background Understanding (cont’d) 4 WMWD’s Murrieta Division Annexed into WMWD – November 27, Separate financial division, with unique rates and charges. Well water plus supplemental imported water from EMWD. Sewage treatment through RCWD from Santa Rosa Plant and EMWD’s Temecula Valley RWRF. Murrieta Division Water Facilities 3 Storage Tanks – 3.7 MG 1 Pump Station, 2 Wells 53 Miles of Water Pipeline

Our Understanding (cont’d) 5 WMWD’s Murrieta Division Annual Operating Budgeted Revenue (FY 2014/15): o Water: $4.4 million o Sewer: $2.0 million Outstanding Debt: o Water: $1.1 million o Sewer: ~$8 million (Santa Rosa net estimate) Dedicated Operations staffing: 2 FTE’s Murrieta Division Sewer Facilities 1 Lift Station 30 Miles of Sewer Pipeline

Murrieta Service Area Average Customer Water and Sewer Rate Comparison 6 Approximate Annual Rate Differential = $1.1 Million

Considerations for Potential Change in Water and Sewer Service 7 Challenges: Murrieta Division physically remote from WMWD’s retail water/sewer operations. Supplemental wholesale imported water needs to be purchased through EMWD’s system (ultimately 85% of demands). Sewage treatment under arrangement with RCWD has governance, cost and accounting issues to resolve.

Considerations for Potential Change in Water and Sewer Service 8 Opportunities: Economies of Scale for both Water and Sewer Operations: o EMWD is lowest cost provider in area. o Existing EMWD customers benefit from additional customers to share fixed costs. Immediately adjacent to EMWD retail operations: o Operational efficiency. o Improved emergency response. Provides options to evaluate and ensure lowest cost sewage treatment for customers.

Proposed Policy Principles - Service Transition to EMWD 9 Service Efficiencies: Provide the opportunity to reduce water and sewer rates through economies of scale, service efficiencies and lower operating costs. Governance: Incorporate a governance structure that retains the seat of the sitting WMWD Board member to ensure continuity of existing elected local representation. Staffing: Implement a staff transition plan at WMWD’s discretion that provides the opportunity for staff members to either join EMWD in similar positions/compensation.

Proposed Policy Principles 10 Financial Parity and Equity: o Financial transition plan resulting in economic parity between the Murrieta Division and EMWD. o EMWD customers not required to subsidize Murrieta Division rates. o Murrieta Division customers receive the benefit of past investments in water and sewer assets. Operational Parity: Finance and implement capital improvements in the Murrieta Division and EMWD transmission system, as necessary, that will ensure the same levels of water and sewer system reliability and service as exists in EMWD. Rate Transition: Provide a rate plan that, to the extent feasible, results in the migration of rates and charges to EMWD’s upon achieving economic and operational parity.

Conceptual Service Proposal 11 Transition of Service: o EMWD will become full retail water and sewer service provider upon LAFCO approval. o All water and wastewater assets, liabilities and obligations (contractual/financial) transferred to EMWD. o Murrieta Division customers immediately receive service levels identical to all EMWD water/sewer customers. o EMWD would absorb employees servicing the Murrieta Division, at WMWD’s request. Murrieta Division customers would receive an immediate rate reduction

Conceptual Service Proposal (cont’d.) 12 Governance: o Upon LAFCO approval, EMWD’s retail boundaries will be adjusted to include the Murrieta Division. o Western MWD boundaries will not be adjusted, and will initially remain the wholesale agency. Will maintain current WMWD Board member is seat and boundary for duration of office (current and subsequent terms). Second phase adjustment to WMWD’s boundary will occur only after office is vacated. Will be guaranteed through Consolidation Agreement approved by Boards and included in LAFCO action.

Conceptual Service Proposal (cont’d.) 13 Financial and Operational Transition: o Determination of Buy-in Costs: Determination of needed capital improvements. Financial liabilities and reserve needs. o Determination of Credits: Non-operating assets (Buy-in Costs – Credits) = Acquisition Balance o Apply difference in rates to pay-down acquisition balance until financial parity achieved.

14 CATEGORYAMOUNT Capital to fund system deficiencies$5,900,000 Consolidation costs$110,000 Outstanding debt$990,000 Total estimated buy-in:$7,000,000 Acquisition Balance – Water System Example Calculation of Buy-in Costs Acquisition Balance Conceptual Example

15 CATEGORYAMOUNT Buy-in Cost (previous Page)$7,000,000 BUY-in Credits: Cash transferred$1,000,000 Value of non-operating real property assets$500,000 Value of surplus system capacity that can benefit consolidated district $500,000 Total estimated credits:$2,000,000 Net buy-in costs for Agency A:$5,000,000 ESTIMATED ANNUAL PAYMENTS FROM RATE DIFFERENTIAL (Assumes 5% rate reduction): $807,120 ESTIMATED TERM:6.2 years Acquisition Balance – Conceptual Water System Example Net Buy-in Cost & Credits Acquisition Balance Conceptual Example

Agency A Acquisition Balance $2.70/ccf $2.57/ccf$32.60/mo $34.00/mo 5% Rate Reduction $2.32/ccf $12.75/mo $5.0 million Commodity Meter Charge $807,120/yr = 6.2 years $807,120/yr $128,250/yr*$678,870/yr = = Agency B + Rate Mechanism Illustration – Water System * Based upon 15 ccf/mo

Requested Action 17 WMWD Board Actions Requested: o Concur with Consolidation Policy Principles as presented. o Authorize WMWD staff to support EMWD staff, as needed, to complete EMWD’s due diligence. o Authorize WMWD staff to support EMWD staff, as needed, to finalize EMWD’s formal proposal for consideration by both WMWD and EMWD Boards.

Overview of Next Steps if Requested to Proceed by WMWD 18 Due Diligence Phase (complete by July 2014) o Perform Water and Sewer System Condition Assessment. o Complete water and sewer system Due Diligence in cooperation with WMWD staff. o Develop Preliminary Acquisition Balance / Rate Analysis:  Determine water system improvements and costs.  Analyze best value and lowest long-term lifecycle cost sewage treatment and conveyance alternative with RCWD and WMWD. o Report recommendations to pursue consolidation to WMWD and EMWD ad hoc Committee and Boards.

Overview of Next Steps if Requested to Proceed by WMWD 19 Consolidation Proposal Phase (schedule TBD) o Negotiate and finalize EMWD/WMWD consolidation Agreement Terms and Conditions. Complete and incorporate final Acquisition Balance / Rate proposal. o Develop customer outreach plan. o Develop staff transition plan (as needed) o Review and seek concurrence of WMWD and EMWD Ad Hoc Committee.

Overview of Next Steps if Requested to Proceed by WMWD 20 Approval and Implementation Phase (schedule TBD): o Based upon Ad Hoc Committee review, EMWD and WMWD Boards would consider approval of: Consolidation Agreement based upon recommended terms/conditions. All LAFCO documents (application, resolutions, etc.). Outreach Plans and schedule. o Implementation Activities: Complete customer outreach and community workshops. Initiate and secure LAFCO approval.

Contact Information EASTERN MUNICIPAL WATER DISTRICT Paul D. Jones II, P.E. General Manager (951)