Using Private Capital to retrofit PCWA Zone 3 water related infrastructure

By Yavapai Regional Capital – a regional infrastructure merchant bank

Working Draft for comments

Background

2March 2010

2005 LAFCO Municipal Service Review identified serious deficiencies in water infrastructure in Zone 3

Wells in fractured rock supply most of the well water

Sewage and water can interact in Zone 3Zone 3 is a potential “Katrina Fire”Upper canal flumes are fragile needing

investmentA fire chute containing I-80, UP Rail and fuel

pipelinesZone 3 historically has been the garden of

Placer County– potentially some of the most valuable real estate in

North America from Auburn to Lake Tahoe

Yavapai Regional Capital

3

PCWA Zones

Placer County is approximately the size of Rhode Island

District 5 corresponds closely to PCWA Zone 3

4

PCWA Zone 3 = District 5 I-80, Union

Pacific Railroad and

fuel line

5

Zone 1•$100mm COP debt•100,400 aft/pa•Renegotiate in 2013•Subj. to curtailment

Middle Fork•$100mm claim•License in 2013•Unregulated market•Est. value $1Bn•Based on 10x FCF

Zone 3•25,000 af/pa•Essentially free•For ever•Est value $500mm•No curtailment[?]

PCWA

Joint Powers Authority[Grantor

Trust]

50/50 County/PCWASponsorship

Profits after debt service split 50/50

$1.3 Bn County Managed Fund

[Special Districts]

$100 mm

30-yr Loan

• $100mm Advance Sales/Production Payment•Fair value of “scrap” if no FERC license as 2nd way

out

Individual entities are “ring fenced” as statutory entities subject to “fair consideration

rules

Background

6March 2010

With a new District 5 PCWA Director, Zone 3 now benefits from its own Zone Advisory Council

Zone 3 is a separate statutory entity within PCWA

Benefits from its own dedicated 25,000 acre ft/pa “almost free” water contract – for ever

Essentially equivalent to free gasoline for ever for residents for use within Zone 3

Water is worth more than gasolineYavapai Regional Capital

Background

7March 2010

Comparable transactions equate value of free perpetual [renewable] water at $500million

This is equity belonging to Zone 3 residentsIt’s a real crown jewelUnlike the Middle Fork it does not depend on

A future licensePrior debt service claimsUnregulated power markets

This equity can be leveraged with intelligent debt

Yavapai Regional Capital

The Zone 3 contract

8March 2010

Dated November 17th 1982Not just a sales contract but also conveys

propertyWater goes with the landPotentially immune from statewide cut-backs 25,000 acre feet/p.a.1st 13,000 acre feet/p.a. is freeComplex rebate system after thatAt certain volumes – PG&E pays PCWAPrice can be NEGATIVE

Yavapai Regional Capital

The Zone 3 ambition

9March 2010

Key is to define plan and inherent business risk

Engineer CIP without financial constraintsDesign the project of your dreams

Balance complementary needs of Drinking water & sewage maximizing

technology Fire safety needs for water along I-80 corridor Biomass as fuel load controller

CIP and financial plan will determine financial leverage of $500mm equity

Yavapai Regional Capital

10

The Zone 3 ambition

2-3 x believed achievable = $2BillionWith MF completion guarantee 5x

possibleUp to $3bn - or moreSee letter to Brian Martin 12/7/05Bigger bank for the buck because of

no prevailing wages with MHAAA structure

Key issues

11March 2010

How to optimally ring fence Zone 3Interaction of Zone 1&3 systems means

mutuality must be factored in – physical redundancy has value!

This is NOT secessionHow to allocate costs of canal rebuilds

between Zones 1/3 – particularly upper stretches

Zone 3 could rent new infrastructure to Zone 1

Credit-worthiness of other PCWA counterparties

Yavapai Regional Capital

Key Issues

12March 2010

Zone 3 is analogous to a publicly held corporation with substantial minority interests

These must be protected by arms-length dealings

No big deal - a balanced negotiationExperienced advisers on both sides is normalFairness opinions will be neededIntegrating PCWA engineering

Yavapai Regional Capital

Key Issues

13March 2010

Environmental and anti-growth issues to be dealt with

Except PCWA District 5 voters spoke in November 2008 We want water!!!

Take positive aggressive stance on environmental issues with good engineering

Convince populace it’s good long term business

As is integrated regional planningDon’t create “islands” of poor infrastructureYavapai Regional Capital

Action Plan

14March 2010

Public PolicyMust not be seen as privatizationSee following slide for new hybrid public-

privateRetains electoral control

Legal analysis is key Define engineering plan together with PCWAFinancial plan and credit analysisAttract equity investors and debtOrganize “buy-in”

Yavapai Regional Capital

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Action Plan - Time frame2010 – Continue building grass roots base in

Zone 3Persuade PCWAZone 3 appoints adviser before year-end2011 – Legal, Financial and Engineering Due

Diligence2011 – Target CIP and Financial Plan by year-

end2012 – Implement Financial Plan & Financial

Close2012 – Financial Close by year-end2013-2018 - IMPLEMENT IN 5

MODULES[say]

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Public Policy

Public Agency

Investor owned utility

[Cost plus]Electors CPUC

MHAAA & Zone 3 model – True Public Private Partnership

Public AgencyElectors

Design, Build,

Finance & OperateVehicle

Contract

OR

Traditional U.S. Water Model

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Financing Structure

DesignBuild

FinanceOperateVehicle

$1.3 Bn County Managed Fund

[Special Districts]

Zone 3 Commercial Bank Project

Finance Loan

2013Middle Fork

Zone 3 Project Finance Loan secured •Charge over Zone 3 project assets•Counter guaranteed by MF assets•Until completion

Refinance at completion

Sponsors include private

investors

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Why YRC?YRC was inspired by MHAAAWorld-class team who understand local coffee

shopsTransparencyPublic PolicyEngineeringFinanceComplex Transaction ManagementBuy-in expertise – selling complex “toothpaste”

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What it takesEngineering must drive the projectFinancial engineering comes secondAn ambitious Zone 3 CIPAmbition – rewards are enormousA new model for regional developmentJobs and property values the potential

prizeA “P3” win for California – after SR125!

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Some key playersHomeland Security & Fire ChiefsFire insurers – invest now rather than pay

later!Schwarzenegger/David CraneTom McClintoch/Karin GlennUnion Pacific RailroadJet Fuel pipeline ownersLead equity investorsSquaw Valley Olympic sponsors potentially