Acquisition Considerations: City of Perris Water or Sewer Systems Paul D. Jones II, General Manager Debby Cherney, Deputy General Manager Charles Bachmann, Assistant General Manager September 6, 2016

Perris Water and Sewer Systems City of Perris requested letters of interest for a potential sale in February 2016 EMWD responded in March 2016 Among the policy principals provided in that response: Need for understanding any deficiencies in the systems and the costs for bringing the systems up to contemporary standards Need to understand the obligations to BAI Investors Cost recovery for the above should be confined to Perris customers rather than transferred to existing EMWD customers

Perris Customer Summary North Perris Area 1,353 customers Villages of Avalon & Amelia Square HOAs Developed by Barrett American, which formed the McCanna Ranch Water Co. Downtown Area 2,353 customers (approx. 3,500 EMS)

EMWD Due Diligence EMWD obtained a copy of the due diligence book made available by the City in February 2016 EMWD staff participated in a site review with City staff, as well as other potential private water company investors, in June 2016 EMWD staff reviewed the information made available and held a meeting with City staff in August 2016 City staff provided some additional information subsequent to the August 2016 meeting

North Perris Area

North Perris Area Lawsuit by HOAs Acquired from McCanna Ranch Water Company in December 2008 by the Perris Public Utility Authority (PPUA) for $2 million cash and a $9.36 million promissory note $2 million down payment was funded by the Perris Redevelopment Agency In March 2009, HOAs sued the PPUA, alleging that: Certain water rights were proposed to be diverted for the benefit of the Downtown areas Those water rights were solely to be used for their reasonable and beneficial use because they had paid for the infrastructure through the purchase price of the homes Case was settled in 2012. Relevant key provisions include: A cap on future rate increases of a Consumer Price Index (CPI), regardless of whether that is sufficient to meet system capital and/or operating obligations Asset usage restrictions limited to the benefit of the North Perris area only. Should the system be used to deliver water outside that area, a “usage fee” would apply. The valuation of the usage fee is not defined in the settlement agreement.

North Perris Area Promissory Note $9.36 million due: 1st installment of $4.95 million upon issuance of a permit by the State Water Resources Control Board allowing the appropriation of water from an underground stream in the vicinity of Perris Dam 2nd installment when the State Board issues a permit amendment allowing the appropriation of up to 1,087 acre feet (AF) of water and diversion to other parts of the City of Perris BAI Investors, LLC (BAI) acquired the note in January 2010 BAI sued the City and PPUA in July 2012 for payment under the note Settled in April 2014 City loaned the PPUA $5.88 million for 30 years at 6%; this sum satisfied the 1st installment to BAI (principal and interest) PPUA repaid the City $73,000 in FY 2015; according to City staff, no cash transfers had been made for FY 2016, but they intended to record a transaction to effectuate that payment as part of year-end accounting transactions

North Perris Note Repayment Amortization of the $5.88 million loan from City to PPUA: Would require additional revenues of $33/month from North Perris customers, or Would require additional revenues of $12/month if spread over all Perris water customers Neither system appears to be generating sufficient revenues to repay the loan, exacerbated by sales reductions in FY 2016 under drought mandates City anticipates the North Perris Note repayment through divestiture of the system, with the sales proceeds to be used to repay the City loan 2nd Installment of $4.41 million: City is pursuing amended permit If amended permit is less than 1,087 AF, only $4,500/AF will be due Obligation expires December 2018 Relationship between BAI and City appears contentious; City asserts BAI needs to fund continued pursuit of the amended permit $2 million down payment obligation has been forgiven by the Perris RDA

Downtown System

Downtown System Condition 1999 EMWD system condition assessment identified major deficiencies required to be addressed at that time at an estimated cost of $7.25 million Undersized water lines Substandard sewage lift stations Deteriorated sewage collection system June 2016 site visits with City staff and review of updated maps Some water lines have been upsized Street improvements impacted access at 4th Street lift station, which would need to be relocated Updated cost estimates $13.6 million Assuming $15 million (including a 10% contingency), cost to Downtown ratepayers: $20.50/month/EMS Assumes 30 year financing at 4%

Rate Considerations

Rate Considerations City of Perris rates do not include: EMWD (18 ccf usage, in budget) City of Perris (18 ccf usage) Commodity $44.31 $45.00 Service Charge $13.68 $12.90 Total Monthly Bill $57.99 $57.90 City of Perris rates do not include: Potential estimated $20.50/month to bring system to EMWD standards; or Repayment of BAI note 1st installment ($12 - $33/month depending on size of customer based repaying obligation) Ratepayer affordability is a significant concern

Conclusions and Recommendations

Conclusions and Recommendations Downtown System Substantial infrastructure replacement and refurbishment needs Does not appear to generate sufficient revenues to meet these obligations, or the ability to generate revenue for future repayment obligations to BAI Needed rate increases in the Downtown System would result in rates and charges that were substantially higher than the balance of the EMWD service area, resulting in rate disparity should the area be consolidated into the EMWD service area North Perris Water System Similar constraints with limited benefit Groundwater diversion rights, should those be approved by the State Water Resources Control Board, have potential value Onerous provisions of the settlement agreement with the HOAs regarding CPI caps and asset usage fees make acquisition of this system particularly problematic Staff recommends not moving forward with an acquisition proposal to the City of Perris

Contact Information Paul D. Jones, II General Manager (951) 928-6154 Email: jonesp@emwd.org