ITEM:		ACTION ITEM
1.	AUTHORIZE EXPENDITURE OF BUDGETED FUNDS FOR FINANCIAL SERVICES CONSULTING IN SUPPORT OF DISTRICT’S TESTIMONY IN CPUC APPLICATION NO. 12-04-019
Meeting Date:			January 14, 2013	Budgeted:	Yes
From:			David J. Stoldt	Program/	Other Water Supply Projects – Desal
			General Manager	Line Item No.: 1-8-1
Prepared By:			David J. Stoldt	Cost Estimate:	$17,000 (FY2013)
General Counsel Approval: N/A
Committee Recommendation: N/A
CEQA Compliance: N/A

SUMMARY: In October, both the District and the Mayors’ Authority submitted “Public Agency Participation Proposals” to California American Water (Cal-Am) as part of the CPUC proceeding A.12-04-019.  The District submitted both Governance Concepts and an Evaluation of Capital Financing Alternatives.  Since that time, the District has worked with the Authority’s Ad Hoc team of Chuck DellaSala and Jason Burnett and Cal-Am to focus on two issues:  (1) revising the governance concepts to get Cal-Am approval, and (2) promoting the District’s idea of a contribution of public financing to decrease the cost to ratepayers.  These two items were discussed with Cal-Am on December 11^th and December 20^th, with Dave Potter, Dave Stoldt, and Dave Laredo participating for the District, and again on January 10^th with Dave Pendergrass, Dave Stoldt, and Dave Laredo present.

In order to advance the financing concepts further and to develop testimony for submittal on February 22, 2013 District staff and General Counsel believe that it is important to obtain third party expert testimony in support of its financing proposals. The Authority would also utilize the third party expert and participate in cost sharing.

RECOMMENDATION: The General Manager recommends that the Board of Directors approve the hiring of Raymond James Morgan Keegan to provide financial services consulting and the expenditure of up to $12,500, which represents a 50% cost-sharing with the Authority for a contract not to exceed $25,000 total. The General Manager also recommends that the Board of Directors approve the hiring of Sidley Austin to provide hourly bond counsel services and the expenditure of up to $4,500. The bond counsel services cost would be borne solely by the District.

Raymond James Morgan Keegan’s team leader, Robert Larkins, has executed public debt for Monterey County and the City of Carmel and has been known to the District General Manager for 20 years. Sidley Austin has been advisor to the District on bond counsel matters since the 1992 Reclamation Project financing.

BACKGROUND: The District has made several proposals with respect to financing the Cal-Am desalination facility. Three key proposals made by the District in its October submittal were:

1) If SRF loans are not available, then examine the use of Cal-Am tax-exempt debt instead of taxable corporate debt based on market conditions at the time;

2) Providing a public credit “backstop” to Cal-Am’s credit rating would further reduce the cost to ratepayers, for either taxable or tax-exempt debt;

3) Reduce the financing cost, hence the cost to ratepayers, through a public contribution of funding.

The potential contribution of public capital is envisioned as a municipal debt offering in the public market, where the proceeds are delivered to Cal-Am to be used for construction of the desalination facility, and that amount is removed from the undepreciated rate base and is not subject to a return earned by Cal-Am. The District would not take an ownership interest in the facility, but revenues required from ratepayers are reduced. Repayment is secured by the District’s revenues, which would include a Surcharge collected on the Cal-Am bill. The Surcharge is set to equal 100% of the debt service in each future year. Cal-Am agrees that it does not book the surcharge as a debt. The District will covenant to maintain its revenues in an amount equal to 125% of debt service required in each year and will pledge to enact a Proposition 218 process in the future to maintain its revenue pledge, should Cal-Am falter and the Surcharge is inadequate. The District will also borrow and maintain a debt service reserve fund equal to one year’s debt service. This is summarized in the attached Exhibit 1-A.

The District has identified the need for the following from the financial services consultant:

Consultant will familiarize self with public financing proposals for California American (Cal-Am) desalination facility as proposed in their application to the California Public Utilities Commission (A.12-04-019) and provide expert testimony in support of other testimony to be filed by two public agencies – Monterey Peninsula Water Management District and Monterey Peninsula Regional Water Authority.

Consultant will peer review analyses performed by the District and provide its own findings with respect to financing structures, credit ratings, market conditions, and so forth. Consultant is expected to rely on a memorandum to be produced by bond counsel, as well as its historic and current market information. Specific areas of expertise desired:

· Does District have debt capacity sufficient to provide “public contribution” as outlined in Exhibit 1-A?

· Can private activity certificates of participation be sold by District and proceeds delivered to investor-owned utility without an ownership stake in facility or water produced?

· Is sufficient private activity volume cap likely to be available through CDLAC?

· What bond covenants will be required to provide secure financing and an investment grade credit?

· How can the debt be structured so that it cannot be booked as a debt by the investor-owned utility?

· Review and understand utility financing model and calculation of savings and NPV savings.

· Review and understand financing alternatives for the debt component of financing.

· Be prepared to discuss current market conditions and relationship between taxable and tax-exempt market for various credit ratings and potential financing structures.

· Be prepared to demonstrate historical relationship between taxable and tax-exempt market.

· Be prepared to offer your firm’s views on long-term interest rates and relationship between taxable and tax-exempt yields.

The Authority has identified 5 additional desired areas:

· What is the broader applicability to all projects and which are specific to Cal-Am?

· What is the risk associated with the timing of investment?

· What can be done to ensure State Revolving Fund monies are treated as a contribution, not debt?

· Examine the use of Surcharge 2 monies.

· Should public contribution be made to the whole project or a segment of the project?

Consultant will be prepped by public agency attorneys on proper form of testimony, interrogatories, format, and responses. Written testimony will be prepared for submittal February 22, 2013 and consultant will be expected to be available for evidentiary hearings April 2-11, 2013.

The District has identified the following key questions to be addressed by Bond Counsel in the form of a memorandum to be delivered by the first week of February:

· Can private activity certificates of participation be sold by District and proceeds delivered to investor-owned utility without an ownership stake in facility or water produced?

· What is the “public purpose” such that a contribution is not a gift of public funds?

· If Cal-Am would be benefitted by the issuance of its own tax-exempt debt, can the District serve as conduit issuer?

· How might the District lend its public credit as a “backstop” to a Cal-Am debt issuance, either as a stand-by water purchase agreement or other?

· What other financing structures might be available to the District or Cal-Am that could reduce the cost to ratepayers?

EXHIBIT

1-A Overview of Financing Structure and Benefits of a Public Contribution

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