1. Exploring Private Financing for Water Infrastructure Prescott Valley, Arizona John Munderloh John Munderloh Water Resources Manager Prescott Valley, AZ

2. Town of Prescott Valley Founded 1978 38,000+ people 44,000 in water service area 18,000 service connections Provide municipal water to people, businesses and cattle 5,100 feet above msl 12” annual rainfall

4. Prescott Valley Water (circa 2005) In water business for about 8 years 2004 IGA with Prescott – Big Chino Water –Town needed $ to pay its share –Current customers did not want to pay for it –Rates and impact fees from future customers are years away Water Supply (CAWS) for existing platted lots only –Supply of platted lots likely to be consumed by 2012 Need water rights for planned development, money to pay for water infrastructure, and infrastructure to prove up the water right

5. Catch-22

6. Breaking the Cycle Explored if Big Chino water rights (ARS 45-555(E)) have value to pay for project. ADWR concluded that uncertainties about pipeline construction would not meet qualifications for an assured water supply. Town concluded that water rights not meeting AWS criteria have very little value

7. Effluent as an AWS Supply Town asked ADWR to recognize credits for effluent that has not yet been recharged. ADWR agreed that future effluent credits would meet AWS criteria based on: 1.Existing and platted lots based on CAWS (pre- declaration) 2.Existing infrastructure to capture and treat wastewater 3.Existing permitted capacity in the Town’s recharge facility 4.Demonstrated annual recharge credits

8. First Public Water Auction –Auction process used to sell other excess Gov’t properties –Transparent process – no backroom deals –Generate highest and best value for community –True market value for water resources (typically subsidized by governments)

9. Water Sale Requirements Water must be used in Prescott Valley Water rights can be re-sold Must be used within 25 years or Town regains control of water rights Town gets full payment at sale

10. Auction Day Held auction in October, 2006 Had no conforming bids, one non- conforming bid We failed, but we made first contact with private water equities

11. Aqua Capital – Price Floor Agreement Negotiated more favorable (flexible) terms to attract private investors Developed a Price Floor Agreement –Aqua Capital agreed to take deal at a pre- negotiated price –Town can sell at a better price (but pays a breakup fee) Price Floor Agreement and Auction Bid documents conformed in all aspects except unit price of the effluent.

12. Price Floor Agreement (cont.) Price Floor established minimum opening bid (>$19,500 per ac-ft) Town obtained an insurance policy - a guaranteed purchaser.

13. Auction Day – Round Two Qualified Bidders: –Aqua Capital Management –PV Developers Consortium –Water Property Investors Winning Bid: Water Property Investors, LLC $24,650/acre-foot $24,650/acre-foot 2,724 acre-foot total package 2,724 acre-foot total package valued at $67 million www.waterinv.com

14. Awards Recognized by Global Water Intelligence and the International Desalinization Association for “Water Deal of the Year” 2007 (second place).

15. Some lessons Need a “Bridge” to fill time gap between loan repayment and revenue stream In this case “Bridge” financing was based on existing infrastructure and water supplies (WWTP & Effluent) Water rights have value only if AWS-eligible As a water provider, we know water, not water markets Private sector is better at structuring risks and terms of a deal

16. Exploring Private Financing Big Chino Project Expressions of Interest from 13 multi- national firms Eight firms met to provide thoughts on how they might deliver the project Common theme: –Financing package can be structured multiple ways –Risk is shared or allocated to party best suited to manage it –The public partner needs a P3 expert that can speak the language and be their advocate

17. Sample Finance Options – P3 Duration of Equity Agreement (BOOT) Graduated payment related to increased water demand Take or Pay Commodity marketing Pledge user fees Combine distribution utility and conveyance infrastructure to develop immediate revenue stream

18. Request for Qualifications Finance, Law and technical services - 37 responses Lesson – pick the financial expert first, then they will advise about the other fields of expertise