NHA | ADVISORS Strategy. Innovation. Solutions. Pajaro Valley Water Management Agency Financial Review and Initial Assessment October 22, 2014

NHA | ADVISORS Strategy. Innovation. Solutions. Discussion Points 2  NHA Advisors – Who Are We?  Approach to Financial Assessment  Agency Reserve & Capital Planning Policies  Agency Debt Obligations  Debt Covenants  Refinancing Options  Next Steps/Process  Municipal Market Update

NHA | ADVISORS Strategy. Innovation. Solutions. NHA | ADVISORS Strategy. Innovation. Solutions. Who Are We?

NHA | ADVISORS Strategy. Innovation. Solutions. NHA Advisors – Independent Municipal Advisors 4  Finance Experts Advising California Public Agencies  Focus on Planning and Policies Related to Capital and Operating Expenses  Funding Solutions Include:  Grants  Internal sources  Subsidized loan programs  Bank/capital providers  Traditional bond financing  NHA Is Not An Underwriter or Advocate for “Bond” Financing  NHA has a Fiduciary Responsibility to Act in the Best Interest of Our Clients

NHA | ADVISORS Strategy. Innovation. Solutions. NHA | ADVISORS Strategy. Innovation. Solutions. Approach to Financial Assessment

NHA | ADVISORS Strategy. Innovation. Solutions. Components of Financial Assessment 6 Reserve Policies (Capital & Operating) Existing Fund Balances Near-Term Capital Needs Revenue/Rate Structures Existing Debt Obligations Alternatives for Refinancing  What are:

NHA | ADVISORS Strategy. Innovation. Solutions. NHA | ADVISORS Strategy. Innovation. Solutions. Agency Reserve & Capital Planning Policies

NHA | ADVISORS Strategy. Innovation. Solutions. Reserve Policies/Considerations 8  General Reserve (Economic Uncertainty)  Typically 3%-5% of general fund  Operating Reserve  3-6 months of annual operating expenditures  Rate Stabilization Reserve  Only used for revenue-secured debt obligations  Capital Replacement Reserve  Typically calculated based on annual capital appropriation

NHA | ADVISORS Strategy. Innovation. Solutions. NHA | ADVISORS Strategy. Innovation. Solutions. Agency Debt Obligations

NHA | ADVISORS Strategy. Innovation. Solutions. Debt Summary 10  $53 Million of Outstanding Debt  Total combined annual payment: $4.1 million for next two years and $4.9 million thereafter (through 2037)  All except for the Watsonville 2007 Water Revenue Bonds (2016) can be redeemed (“called”) anytime without penalty

NHA | ADVISORS Strategy. Innovation. Solutions. NHA | ADVISORS Strategy. Innovation. Solutions. Debt Covenants

NHA | ADVISORS Strategy. Innovation. Solutions. 1999A Certificates of Participation 12  Installment Purchase Agreement: All Revenues pledged to the payment of the 1999A Installment Payments  Installment Payments payable from Net Revenues of the Agency  Net Revenues = Total Revenues less Operations and Maintenance Costs  Rate Covenant: Agency shall fix, prescribe and fix rates and charges for water service such that Net Revenues are at least 125% of that fiscal year’s debt service  Additional Bonds Test: Agency can issue additional bonds if prior year (and estimated future) Net Revenues equal at least 125% of annual debt service  Reserve Fund: Must maintain DSRF at maximum annual debt service ($1,379,737.50)  Requirement currently satisfied with a surety bond

NHA | ADVISORS Strategy. Innovation. Solutions. SWRCB Loans (1999 & 2003) 13  Future Debt: All future debt incurred by the Agency shall be on parity with, or subordinate to, these loan obligations  Prepayment: Agency can prepay prepay all or any portion of the outstanding principal amount of the loans at any time without penalty

NHA | ADVISORS Strategy. Innovation. Solutions. DWR Loan (2005) 14  No additional loans issued with higher priority without prior written consent of the State  Must levy and collect assessments in an amount necessary to operate and maintain the project and meet the payments of the loan  Agency must continue operating Project in an efficient and economical manner, providing for repairs, renewals, and replacements necessary  Must establish dedicated revenue source for repayment of the loan  Must maintain Fiscal Agent, Fiscal Services Agreement, and dedicated repayment account  Agency agrees to grant to the State security interests in real and personal property as necessary to secure obligations  Reserve Fund (1 year debt service) accumulated over 10 years

NHA | ADVISORS Strategy. Innovation. Solutions. City of Watsonville Obligation (2007) 15  Not a Direct Obligation of Agency  Not Subject to Rate/Coverage Covenant  City holds Grant Funds that can be used to redeem a portion of obligation  Subject to full or partial redemption in 2016  Agency may execute refinancing in 2016 if interest rates are lower than 2007 interest rates

NHA | ADVISORS Strategy. Innovation. Solutions. NHA | ADVISORS Strategy. Innovation. Solutions. Refinancing Options

NHA | ADVISORS Strategy. Innovation. Solutions. Debt Refinancing Options 17  Evaluate ALL Agency Obligations  Take Into Consideration Project Needs  Incorporate Financing Options into Rate Study

NHA | ADVISORS Strategy. Innovation. Solutions. Refunding Scenarios 18  Refund 1999 Certificates of Participation (“COPs”)  Annual savings of $199,000 through 2029  NPV savings: $2,270,000  Refund Two State Water Resources Control Board (“SWRCB”) Loans  Annual savings of $1,500 through 2024  NPV savings: $63,000  Refund Department of Water Resources (“DWR”) Loan  Annual loss of $13,500 through 2028  NPV loss: $99,000

NHA | ADVISORS Strategy. Innovation. Solutions. Additional Information 19  All scenarios assume that a Reserve Fund is required  Investors may not require a Reserve Fund, which would increase savings  DWR loan refunding may be beneficial even with negative savings  Refunding all outstanding debt gives Agency the ability to alter rate covenants and coverage requirements

NHA | ADVISORS Strategy. Innovation. Solutions. NHA | ADVISORS Strategy. Innovation. Solutions. Next Steps

NHA | ADVISORS Strategy. Innovation. Solutions. Process for Refinancing and Funding Projects  Reserve & Capital Policy Discussion  Complete Rate Study and 218 Process  Identify Project Timing  Develop Financing Plan and Legal Documents  Agency Board Approval of Financing Documents  Solicit Bids for Financing/Lock Interest Rates  Refinance Debt/Fund Project 21

NHA | ADVISORS Strategy. Innovation. Solutions. NHA | ADVISORS Strategy. Innovation. Solutions. Municipal Market Update

NHA | ADVISORS Strategy. Innovation. Solutions. Municipal Market Update 23  Tax-Exempt Volume is Down (below historical averages)  Treasury Yields  10-Year Treasury approximately 2.20%  30-Year Treasury approximately 2.95%  Bond Investors  Public agency financials improving (better credit)  Interest rates appear to be holding  Community banks continue to invest In tax-exempt securities (looking to shorter-term maturities)  Traditional municipal investors creating demand higher than supply  SEC/MSRB demanding more due diligence and disclosure information in offering documents