Eric S. Petersen, Law Partner Hawkins Delafield & Wood LLP New York, NY United States Conference of Mayors Urban Water Council 2005 Urban Water Summit September 30, 2005 Albuquerque, New Mexico DESALINATION DESIGN-BUILD: THE SAN JUAN CAPISTRANO PROJECT Hawkins Delafield & Wood LLP

2 PROJECT ELEMENTS 4 MGD reverse osmosis treatment plant with pretreatment 8 groundwater extraction wells 5,000 acre feet annual production Raw and finished water pump stations and transmission lines Brine disposal line

3 CHALLENGES Limited staff availability Limited expertise in groundwater treatment technologies Aggressive schedule to meet deadlines for $250 per acre foot subsidy from Metropolitan Water District

4 PROJECT GOALS Assure adequate water supply through local sources Avoid constructing large water reservoir Accelerated schedule Improved technology Single source responsibility Performance – based contract Private sector financing risk

5 PROCUREMENT GOALS (1): EARLY PRICE CERTAINTY DBB City design costs 6 -10% of construction cost Bidder's price may exceed designer's estimates Project may be delayed or re-designed DBO City design costs 1-3% of construction cost Proposers design to level necessary to guarantee price City obtains price and performance guarantees for low cost

6 PROCUREMENT GOALS (2): CHANGE ORDERS MINIMIZED DBB Bid protests can be common Construction monitoring is 6-8% of construction cost Change orders can be prevalent Litigation often accompanies contract awards and change order disputes DBO Proposals protests are uncommon Construction monitoring is 1-2% of construction cost Change orders are rare Procurement Litigation is rare

7 DBO PROCUREMENT CA Government Code 5956 RFQ/RFP Process Concurrent Price, Non-Price Review “Best Value” Staff Selection Council Contract Approval

8 TIMEFRAME 1993 – 2000 planning 2000 – RFQ Process (Eco Resources, Earth Tech, Ionics) 2001 – RFP Process 2002 – Contract Execution and Financing – Permitting Construction and Commissioning 2005 – Operations

9 PARTICIPANTS City of San Juan Capistrano (CVWD) Advisors – Pirnie and Hawkins Contractor Team – Eco Resources, Boyle Engineering, and ARB, Inc. Guarantor – Southwest Water Financing – Lehman Brothers and AMBAC bond insurance

10 CITY RETAINED RIGHTS AND RESPONSIBILITIES Ownership of assets Ownership of system revenues Setting user rates Capital planning Bond financing (tax-exempt) Securing sites and rights-of-way Obtaining water rights (San Juan Basin) Obtaining MWD Subsidy

11 PRICING AND PERFORMANCE GUARANTEES Fixed Design-Build Price ($25 million) Fixed Annual Service Fee ($1.1 million); Electricity ($1.0 million) Water Treatment (7 enhanced standards) Water Delivery (5,280 acre feet/year) Production Efficiency (80%) Hydraulic Transients Electricity Usage (Guaranteed Maximum Utilization of 9,092,300 KWH/year and Guaranteed Max Demand of 1,275 KWH)

12 RISKS TRANSFERRED (1) Internal disputes among designer, builder, operator, and equipment supplier Design, permitting, construction and operating cost overruns Scheduled Acceptance Date (2 years: permitting, design, construction, commissioning, acceptance testing) Extension Period

13 RISKS TRANSFERRED (2) Subsurface geotechnical risk Regulatory compliance (fines, penalties) Capital maintenance risk (major maintenance, repair and replacement) Energy consumption excesses Loss of MWD subsidy due to Company non-performance

14 FOCUS ON PERMITTING RISKS DHS Domestic water supply permit Pilot testing Terms and conditions Delay Non-issuance Payment for permitting design costs

15 RISKS NOT TRANSFERRED (1) “Uncontrollable Circumstances” Pre-existing environmental conditions Specified site conditions Buried infrastructure repair costs Changes in law Force majeure

16 RISKS NOT TRANSFERRED (2) Raw water quality exceedencers General electricity rates (Indexed) General price inflation (Indexed) General interest rates

17 SECURITY FOR PERFORMANCE Southwest Water (Parent Guaranty) Performance and bonds Letter of credit (1.5 years debt service – for AMBAC) No stated monetary limit on liability

18 DBO SAVINGS Source of savings – Core competency –Competition as to design; operator-driven –Competition as to operation –Cooperative relationship between designer, builder and operator –Smaller contingency allowances –Bulk consumables buying power –Broader technology access Preventive v. breakdown maintenance Optimized balance between capital and operating costs Excessive redundancy eliminated

19 FINANCING PLAN No SRF funding City revenue debt Enterprise fund Tax-exempt (IRS Rev. Proc ) Ambac Bond Insurance Feasibility study

20 CONTRACTOR FINANCING SUPPORT City debt cancelled if Company defaults Directly transfers “completion” and “performance” risks to Company Southwest repays Ambac up to $6.0 million Ambac has “cure rights”

21 MUNICIPAL CONTROL Comprehensive asset development and management Minimum design requirements and quality standards Performance guarantees (repairs, fines, damages) Costs guaranteed Management by “full-service” contract Vigorous, broader competition and cooperation Convenience termination rights (10 years)

22 LESSONS LEARNED Allow full vendor comment on proposed transaction – and listen Private financing and siting complicates the transaction Minimum design requirements are key Early pilot testing is advisable Attempted transfer of excessive risk is counter productive

23 INGREDIENTS FOR SUCCESS Initial strategic planning Thoughtful, well developed RFQ/RFP Creative and responsive proposals Clear, comprehensive contract Full proposer due diligence opportunity Fair and balanced risk allocation Outstanding leadership