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Minutes - 2008 - City Council - 03/18/2008 - Regular EAGLE CITY COUNCIL Minutes March 18, 2008 I. CALL TO ORDER: Mayor Bandy calls the meeting to order at 7:30 p.m. 2. ROLL CALL: GUERBER, HUFFAKER, SHOUSHTARlAN, SEMANKO. All present. A quorum is present. 3. PLEDGE OF ALLEGIANCE: Mayor Bandy leads the Pledge of Allegiance. PUBLIC COMMENT: Debra Helton, 1203 Fairmont Court, this is the first opportunity I have had to address the new Mayor and Council Members. I served on the LID Citizens Committee. After several meetings and going through testimony and letters, It is unfortunate that these people were not at these meetings, as they were opened to the public. One of the questions asked of us was: "from the information presented do you believe the acquisition of Eagle Water Company complete with customer base, infrastructure and water resources is in the City and Public's best interest!" My answer was yes. I feel that integrating the two systems alleviates the deficiencies of both systems giving the people within the LID the best possible water system plus the tremendous benefit of senior water rights. The next questions was "given the Committee's limited time to discuss available information and City's process, have you gained more confidence in the two year effort of negotiation, evaluation and due diligence being performed by the City? " My answer was yes. I feel it is unfortunate that due to legalities, the City was unable to bring this matter to the attention of the people earlier, but after 8 hours of focused discussions with Vern and the other members of this committee, I feel the City has advanced according to the structure of the law. The next questions was "with the merger of the systems and specific improvements outlined in the Purchase Agreement, can you see a basis for some allocation of performance benefits to all parties in a Local Improvement District?" My answer was yes. As previously stated both systems have deficiencies. A consideration of the cost for the City to improve its current system must be considered if this purchase does not take place. Merging the two systems, as I understand it, will make for a more viable, complete water system, better able to serve the residents within the LID boundaries. The fourth question was "from the discussion of improved water system reliability, sustainability, and potential beneficiaries, does the Local Improvement District boundary appear reasonable?" Generally yes. It is obvious that United Water customers cannot be included. I also understand that areas outside the City boundaries cannot be included but I wonder if there is any way to address the properties on the east side ofHwy 55 that are currently being serviced by the Eagle City Water who will definitely benefit from the improved water system, The last question was "based on your limited assessment of the potential value of the system and value to the City, does the purchase price of $6.3 million in the Agreement appear to be reasonable?" My answer was yes. Looking at the Eagle Water Company as a whole including 6 existing wells, boosters, flow equalization reservoir, water mains and customer base is significant but only part of the purchase. The senior water rights, some dating back to the 1970's, which are included in this purchase are an important factor. All taken into consideration, it would appear that this reasonable purchase price. Discussion on the water rates and the potential increase in rates. I am on the Eagle Water Company. My water rates would be lower with the City of Eagle than with United Water. The Eagle Water Company is going to sell so we have to look at what options are there. I wish you the best of luck, Derek T. Smith: I came to this country in 1970, I have lived in this area for 10 years. When I received my first letter about the purchase of Eagle Water Company I was somewhat concerned. After thinking about this I realized that it was better for the City to purchase Eagle Water Company rather than have a French Company, United Water. I am in favor of this purchase. Joel Courtial: I have been out here for 25 years as a dentist. The bad news is that you by passed the general public. Discusses whether or not the purchase of Eagle Water Company is a good deal. Why wasn't an appraisal done. Discussion on appraisal methods. Eagle Water Company was not properly valued. The owner of Eagle Page I K\COUNCIL\MINUTES\Temporary Minutes Work Area\CC-03- 18-08mindoc Water Company donated $1,000.00 to Phil Bandy's election campaign. Discussion on the purchase agreement and engineering report. You should put this matter in the voter's hands after you have done the proper homework. Greg Fisher: This is the second time I have been in front of the Council; the first time was on the golf course. I own bonds all around the Country. I have been here for 7 years and 1 have poor water pressure. If the City wants to buy it they should float bonds to pay for the water company. Roger Simmons: I believe in a representative form of government. Discussion on voting as a citizen. Discussion on a comment the Chamber of Commerce made several years in regards to the City purchasing Eagle Water Company. Why don't you want to let the citizens' vote on the issues? Discussion on a previous Fire District vote. You should let us vote and we should vote, But I don't want to vote ifmy vote doesn't count. Jacob Deaton: I want to raise a voice of warning that this is unconstitutional. What doesn't appear is what the Idaho Constitution says about the issue. Discussion on the purchase of the water system. Discussion on the Court's decision on the Boise Police Department. Discussion on a vote on the LID. Asks Council Members to vote against the Ordinance, repeal Ordinance 571, and present this to the voters in a special improvement bond election. Tom DeShazo, I am not representing my brother here tonight, he is the President of Eagle Water Company. Discussion on the contribution to the Mayor's campaign and this is because we own a lot of property in Eagle and we had very specific reasons because of growth issues. Eagle Water assets are also owned by a trust in the DeShazo family. The DeShazos' have a family trust and Robert DeShazo has controlling interest. Discussion on the water rights. The acquisition of Eagle Water based on the non-committed asset of the water rights not being pumped is about $750 an acre foot. In Las Vegas it is $2,400 an acre foot. A recent sell in Ada County was $2,500 an acre foot. We have an appraisal is $900 to $1,300 an acre foot for the non-committed water rights. It is in the interest of the DeShazo family for this sale not to go forward because we have received other offers. I would like to hold on to the water rights because they will increase over the years and the water rights could be worth $25M, 4. PUBLIC HEARINGS: A. CU-15-07 - Childcare Facilitv (Davcare Center with oreschool) within an existin!! Multi-tenant Office Buildin!! - Sarah Johnson and Brian Svverson: Brian Syverson and Sarah Johnson are requesting conditional use permit approval for a 1900-square foot, 2-classroom Childcare Facility (Daycare Center with preschool) within Unit], Multi-tenant Building A, of Inland Condominiums. The 1.64-acre site includes two multi-tenant buildings and is located on Lot 1, Block], of Inland Subdivision on the south side of East Iron Eagle Drive approximately 500-feet east of East Plaza Drive at 1107 East Iron Eagle Drive. (WEV) Mayor introduces the issue. Brian Syverson, applicant, provides the Council an overview of the conditional permit. I agree with the specific conditions of approval that went through P&Z. General discussion. Discussion on parking. Planner Williams: provides the Council an overview of the conditional permit. General discussion. Discussion on the parking spaces. There will be no long term parking for parents. Mayor opens the Public Hearing Erica Satsky, We would love to have this pre-school, there is lots of parking, its logical. Let him have it. Mayor closes the Pubic Hearing Semanko moves to approve CU-15-07 - Childcare Facility (Daycare Center with preschool) within an existing Multi-tenant Office Building. Seconded by Shoushtarian. General discussion. ALL AYES: MOTION CARRIES... ................ Page 2 K\COUNCIL\MlNUTES\Temporary Minutes Work Area\CC-03- I 8-08min doc B. CU-05-06 MOD - Modification of site soecific condition of aDoroval No.5 for CU-05-06 (Hei2ht Exceotion Conditional Use Permit) - Sea 2 Sea. LLC: Sea 2 Sea, LLC, represented by James Murray with CSHQA, is requesting a modification to the conditional use permit previously approved for a height exception for the condominiums within the Lofts at Eagle River residential development. The modification is a request to modify Condition #4 to allow an eighteen (18) month extension of time for the issuance of building permits before the conditional use permit for the height exception becomes null and void. The 25.37-acre site is located on East Riverside Drive approximately 1500 feet west of Edgewood Lane at 827 East Riverside Drive. (WEV) Mayor introduces the issue. James Murray, CSHQA Architects representing the applicant, provides Council an overview of the modification to the conditional use permit. We are asking for an 18 month extension. General discussion. Planner Williams: provides Council an overview of the modification to the conditional use permit. Mayor opens the Public Hearing Mayor closes the Public Hearing James Murray discusses the timeline and the request for the extension of time. Guerber moves to approve CU-05-06 MOD - Modification of site specific condition of approval No.5 for CU- 05-06 (Height Exception Conditional Use Permit) as proposed with the 18 month extension. Seconded by Semanko. Discussion. ALL AYES: MOTION CARRIES............... C. RZ-17-04 MOD - Modification to Develooment A!!reement (Instrument #106057136) - Ea21efield Estates LLC: Eaglefield, LLC, represented by Peter Harris, is requesting a modification to the rezone development agreement for Eaglefield Estates Subdivision. (WEV) Staffis requesting this item be continued to the March 25, 2008, meeting. Mayor introduces the issue, Guerber moves to continue RZ-17-04 MOD - Modification to Development Agreement (Instrument #106057136) - Eaglefield Estates LLC to the March 25, 2008 City Council meeting. Seconded by Huffaker. ALL AYES: MOTION CARRIES................... D. A PUBLIC HEARING ON CONFIRMATION OF ASSESSMENT ROLL FOR LOCAL IMPROVEMENT DISTRICT 2007-1: Notice is hereby given that Tuesday, the 18th day of March, 2008, at the hour of7:30 o'clock P.M., as soon thereafter as the matter may be heard, the City Council (the "Council") of the City of Eagle (the "City"), will hold a public hearing on the assessment roll for Local Improvement District No. 2007-1 ("L.I.D. No, 2007-1 ") at Eagle City Hall, 660 East Civic Lane, Eagle, Idaho. The assessment roll is on file at Eagle City Hall. At the hearing, the Council will hear and determine all objections to the regularity of the proceedings in making assessments, the correctness of assessment, and in the amount levied on particular lots or parcels in relation to the benefits accruing thereon and in relation to the proper proportionate share of the total cost of the improvements. Each owner of property within L.I.D. No. 2007-1 is hereby further notified that, as provided in Section 50-1714, Idaho Code, in revising the assessment roll at or after the hearing, the Council may increase any assessment or assessments up to twenty percent (20%) of the original amount thereof as shown on the assessment roll without giving further notice and holding a new hearing thereon. For the purpose of securing the payment of the principal of and interest on the local improvement district bonds for L.I.D. No. 2007-1, it is the intent of the Council to create a reserve fund in an amount not to exceed ten percent (10%) of the principal amount of the bonds to be issued to fund that portion of the assessments not paid within the 30-day prepayment period from the date of the adoption of the ordinance confirming the assessment roll for L.I.D. No. 2007-1. The reserve fund will be funded from assessments against the property within L.I.D. No. 2007-1. Mayor introduces the issue and explains the public hearing process. Once we are done with the public hearings then Council will go into deliberation. Council as determined that 10:30 p.m. will be the cut off time for public testimony Page] K.\COUNCIL\MINUTES\Temporary Minutes Work Area\CC.03-18-08min.doc this evening and the public hearing will be continued if not everyone has been able to testify tonight. Everyone will be given three minutes for testimony. Vern Brewer, Holladay Engineering, City Engineer, presents a Power Point Presentation to put everything on the record. Vern Brewers presentation is interrupted by the audience at 9:05 p.m. Huffaker: discusses the need for Vern's presentation is finished as it is being put into the recorded record. Discusses the public hearing and that the time to finish tonight could be revisited and that the public hearing will be continued so everyone will be able to speak. Vern Brewer continues his presentation. Mayor opens the Pubic Hearing Huffaker: Thanks the pubic for coming. The reason I'm glad you are here is that you want things to be done right. As far as this issue tonight I first heard about this prior to the November elections and I was concerned that there was not vote. I also heard that there was a Citizens Committee that was going to look at this process. I deferred by opinion until after the Citizens Committee made the recommendation to make this purchase. Shows the audience the amount of comments that the City has already received. Your input is valued and will be listened to. The primary concerns people have are as follows: amount of assessment is too high, no benefit to them, acquisition is not a good idea because city doesn't know how to run a water system, is this a good deal, no vote. All of these concerns are legitimate. The Council is considering what the best outcome is for the City. Would it be better for United Water to purchase Eagle Water Company? Is there a more fair way to purchase Eagle Water Company? (Interruption by the audience) It is always best if people testify with civility. Shoushtarian: Thanks the public for coming tonight. We are not part of the decision made last fall we are new Council Members please don't prejudge us, Charles Bower, 1226 Eagle Hills Way, I also have written testimony I will be reading from. 1 am going to cut my written testimony in half. I am currently an Eagle Water customer. I object to the assessment. The City has failed to perform due diligence to the tax payers by failing to get an independent appraisal of the Eagle Water Company, I believe the City has failed to perform a due diligence and has failed to establish a fair market value of Eagle Water Company. I request that the Council invalidate the assessment. Dean Smith, 387 N, Morning Glory Way, I am the President of the HOA of Arbor Ridge Subdivision; my concern is the valuation of the asset. This should be based on the potential revenue and not on the replacement cost. I understand that there have not been improvements for several. Eagle Water Company refused to put in pressurized irrigation. I have written testimony to submit. Bob Atkins, 1107 Pebble Beach Way, I never received a notice of the original hearing and the first notice that I got was the Assessment Notice. I am apprehensive of using a LID for the purchase of a water company; this seems to be unconstitutional according to Title 8 of the Constitution. Discussion on the City being able to manage the water system. If the City decides down the way that the City wants to sell the water system then the City would be making a profit. This should be voted on. Just for the citizens of Eagle we do own this land we don't own the City Hall building. Leslie Stiburek 479 N, Cobblestone Lane, you are charging me 8 assessments on homes that might or not be built. This assessment should be made at the time the subdivision occurs. Catherine Hepner, 642 Steeple View Drive, we have private wells. All of the people in my subdivision should be excluded from the Lid, we should not be charged for fire flow. Discussion on where the Fire Department would get the water to fight a fire on her property. This issue should be brought to a vote. There could be other entities beside United Water that could buy the water company and maybe it would not even be sold. Lynne Sedlacek, 1200 Hereford Drive, I have given my originals to the City Clerk and I have not submitted anything else in writing. I am also representing my parents and the South Sixty Farm. This is bare farm ground and I object to the assessment of $77,077.58 for the South Sixty Farm. It is zoned agriculture and it is currently being farmed. This Page 4 K\COUNCIL \MlNUTES\Temporary Minutes Work Area\CC -03- I 8-08min doc property only utilizes surface irrigation water. There are no structures on the property and no need for a potable water system. LID 2007-1 provides no benefit to our farm. There are no structures on the ground and the crops have no need for fire flow protection other than what is provided by the Eagle Fire District. If our farm were to be developed and require a central water system, then it is assumed the City of Eagle will have a calculated connection/buy-in fee that would be assessed at that time. This is the only way to accommodate existing farm ground. We should not be required to pay thousands of dollars for development that may never happen. The City is forcing us into a position of either selling the farm or taking the City to court to fight our inclusion into the LID. Please remove all of the South Sixty parcels from the LID Assessment Roll. My next assessment ifC-2.37. We object to the total assessment of $26,077.60 for our home and acreage. This is for my parents, Fred and Lois Kunkler. Our property is zoned agricultural and is currently being farmed. The property uses surface irrigation water and our home is on a private well. Again the LID does not provide any benefit to our farm ground. If our home is to be included, then it should be assessed in the same manner as the other homes that are served by private wells. We should not be required to pay thousands of dollars now for development that may never happen, at densities that can't be determined or guaranteed. 1 was on the committee and I was on the City Council when this process started, I support the City and Eagle Water joining together. I think there are benefits to be derived from that. I don't even want my home to be included and my assessment is $195.99. Discussion on the subdivisions that will benefit and pay anything. I thought a Revenue Bond would be the way to go. 1 feel this is very inequitable and is an attack on our farm ground and I would like to have us totally removed. Vince Trimboli, 499 E. Knoll Drive, I think City ownership could be a good idea to have the water rights. This water company is an asset for all of the City of Eagle. Why are 5,000 people being told that they are going to purchase an asset for everyone? People are saying step back and make sure the right people are being assessed and let us have a vote. Richard Verguson 226 S, Harlan Place, we have our own well, we don't need fire flow. Valynn Mathie, 701 W. Kettleman, I have mailed in a letter and I have turned in a letter tonight. I am here to protest my assessment. I am not hooked up to Eagle Water system; we are on a private well. Our property is self sufficient for water. As to fire protection 1 am paying taxes for this. I would like to be removed as I see no beneficial use. I am being assessed for houses that may be built in the future. We don't want to pay for a system that be don't benefit from. John Wall, 2124 E. Courtland Drive, I received an assessment. You don't know what it is worth; we don't know what it is worth. We have a petition I would like to enter into the record. Kristen Reynolds, 1855 N. Estancia, this needs to go to a vote. No lender is going to lend you any money if you don't have an appraisal. It is my understanding that this lien could be passed on at the sell of the home. This should be put to a vote. Pat Miller, 959 Preakness, I guess I am in the minority and we are on a well. Ifmy well goes dry I want to get water. Water is a hot commodity everywhere. My concern is that ifsome for Profit Company buys Eagle Water they could sell it to the highest bidder. I am concerned that I will not have water. Water rights are valuable. Betty Miller, 959 Preakness, when this issue started last fall we were doubtful about the issue and talked to the Council Members and the Mayor. We thought that this would be a good deal. It seems like the real issue is "do we buy Eagle Water Company?" The big issue is who do I want to own Eagle Water Company? I would like me to own it. I'm from Idaho, water means a lot me. I want control of the water company. David Nagoda, 2089 E. Shalimar Drive, discussion on the Engineering Report. We have consistent water at this time. I would like to be removed from the assessment and I would like to see this issue come to a vote. Patrick Miller, I am representing Eagle River LLC, Eagle Hospitality, and Johnson Brothers Hospitality, we have submitted protest letters today. Eagle River did protest the formation of the district. Discussion on the allocation of the benefits. We don't have an appraisal of the water company. Discussion on Senior Water Rights. My clients have spent over $400,000.00 putting in water pipes in the ground. Discussion on the Engineer Report. Perry Gossett, 390 E. Ranch Drive, everyone has said what I was going to say, Who is going to pay for the storage reservoir? We should buy the city water system. Thanks for putting up with everyone. Page 5 K\COUNCIL\MINUTES\Temporary Minutes Work Area\CC-03-18-08min doc Gregg Fisher, 348 Winged Foot Place, 1 have heard all night how we are going to pay for this and we don't own anything. The engineer stated that the City is mismanaging the water system it owns. Why don't you let the entire City of Eagle vote on this? Everyone should be able to vote. I would like to be removed from the assessment as I disagree with appraised values. Dave Saxey, 317 E. Kite, what is the appropriate way to adjust our assessment. We are being assessed for our open space. I disagree on the valve size going into our home, I have two homes in the assessment area. An appraisal should be made and we should have a vote on it. There needs to be a way to tie in those homes East of Highway 55. Is there a drop dead on the contract? Jane Marrs, 2384 N. Edgewood Road, I think that there may be a background offaith and trust in the City. I think the Council should look into an appraisal. We are on our own irrigation and we will never use the water to support this. We believe in what you are doing but we are not sure you are doing it the right way. We are being assessed for Fire Flow. Mike Ryals, 250 S, Harlan Place, I am President of Eagle West Subdivision Water Association, we turned in a letter last October that we be exempt from the LID assessment and we did not get an answer. I am going to submit that letter tonight. We have a well that serves the houses in our subdivision of25 homeowners. We called DEQ in regards to the LID. We have good pressure at the pump and can pump more water than the subdivision needs however; our well can not support a fire hydrant. I went to the Fire Department and asked them if they could put out a fire in our subdivision and they said they would bring in a pumper trucker. There is also a hydrant in the area. From this assessment we are going to get zero benefit from the LID. Discussion on the right to vote. General discussion. Jay Friday, 1538 N. Sunup Way, I served on the Eagle Citizens Water Committee and this matter never came up. I asked what the plans are for Eagle going forward. I never heard that there was low capacity and water pressure. Discussion on beneficial use. I don't use water for landscaping; the people that use the water for landscaping should pay. Jeff Neumeyer, 2359 N. Park Forest Way, I submitted objections on March 6th after I received the first notice. When I got the notice I had no idea if it was a bill and if it was for the purchase of Eagle Water Company. Mayor Bandy I appreciate your letter and it was helpful. My gut reaction that this is probably a good idea but it should be done in a legal fashion. There are some legal problems with the assessments on my property. I want to get my objections into the record. I am a lawyer and I am not an expert on municipal or water law. I do believe this unconstitutional under Idaho law. I would like to vote on this issue. John Grasser, 1745 E. Stonybrook Court, I would like to state my objection to the LID assessment and I question your valuation of Eagle Water Company. I live in Lexington Hills which is the municipal water system. I object because I don't think this is the end of the cost. Discussion of the PUC's assessment of Eagle Water Company and the cost of improvements to Eagle Water Company. You did not do a proper assessment of the company; you could have brought in United Water Company because they are a large company and you could have at least brought them in as an advisor. This is a monumental decision and this needs to be put to a vote. Lisa Grasser, 1745 E. Stonybrook Court, I am against this assessment. Your timing is brilliant with the national economy. I'm not convinced of the benefit to my family, We are on irrigation water for our landscaping, You need to reevaluate the purchase price. Where is the due diligence on the maintenance? I don't agree with the growth in government. I believe the people are better serviced by private enterprise. Let the people vote for this. Jeff Hubert, 416 S, 8th Street, Boise, I represent the owners of the shopping center at State Street and Highway 44 where Home Depot and Winco are located. We received assessments for the common area of about $45,000.00. We had to put in the water infrastructure when the development was constructed, Putting this to a vote is probably the best way to handle this situation. Doug Croft, 1695 E, Pebble Beach, I am an accountant by trade. Discussion on synergy. You need to make the Purchase Agreement public. Paul Robertson, 1142 N. Sneed, discussion on some of the assessment fees. Your job is to take care of people. Discussion on the letter, you could have spoken to me in English. I don't know if there was some type of law that Page 6 K:\COUNCILIMINUTES\Temporary Minutes Work Area\CC-03-18-08min.doc required this letter. Discussion on synergy, If this is a benefit for the entire City than the whole City should pay for this. Discussion on fire flow. Give us the opportunity to vote and have our say. Lisa Mayer, 2303 N. Otter Place, my husband was part of the Citizens Committee and we were upset when we got the notice. He basically thought it was wise to purchase this company. We are not sure if there is going to be an expense for the tank. We would like to know if the water rights are senior water rights. Discussion on how the letter came out before the letter. The committee discussed on how people would be assessed. Tony Blasic, 645 Spyglass Way, I bought my childhood home. Eagle Water has some big problems; we have been fighting with them for years. We need to find out what we really need to fix this. 1 think we need a vote. Mayor Bandy: Discussion on where the process goes from here, The public hearing will be left open for a future date to be set by the Council. After the public hearings are completed then the Council will deliberate. We most likely will be sending out another preliminary assessment notice and there will be another pubic hearing. General discussion. Jeff , 135 W. Floating Feather Road, I don't own property in Idaho how did I get the assessment. 1 rent the home. Does the assessment go to the owner? Laura Ogera, 1438 E, Feather Court, we love the City of Eagle and I know that you are trying your best. There is a community break down and a lot of rumors. I would like you to do your best to dispel the rumors. Semanko: I read all of the protests that we received prior to this hearing. I would like to communicate my thoughts, which can be changed. I grew up in North Idaho that was very rural. I grew up knowing what it was like to have an inadequate water system. I think it is our responsibility to make sure that residents have an adequate water system. I do have concerns about the Notice that was sent out, and I made a motion in regards to the notice. 1 don't believe that we need the Legislature to save us on this; we need to deal with this issue ourselves. It is a matter of public record that the City has been sued on the LID. I'm not sure the equitable concerns on the assessments can be corrected. I have been involved with LID's before. Ordinance 571 was done last year and I will ask to repeal Ordinance 571. I'm not sure we should buy the water system. I feel the LID is shoving a round peg in a square hole. 1 think the discussion needs to go forward for the purchase of the water company. The most serious concerns are from the people that are planning to move or will move if this goes through. We have the duty to look at the final assessment roll and see if we want to approve it. This is where I'm at right now but we have a long way to go in this process. Bandy: I would entertain a Motion to continue the public hearing to April 8, 2008 at 6:00 p.m. So moved by Semanko. Seconded by Guerber. ALL AYES: MOTION CARRIES.............. 5. ADJOURNMENT: Guerber moves to adjourn. Seconded by Huffaker. ALL AYE: MOTION CARRIES... Hearing no further business, the Council meeting adjourned at 11 :20 p.m. Respectfully submitted: e-hCcA-...1 ./ K ~o.l-r~ SHARON K, BERGMA~ CITY CLERK/TREASURER PHILLIP], BANDY MAYOR ""......,.,... "..", ~ ~AGl. "## ",," 0 ........ l: #.... . ~ .. -. ~ I ~ ... <>O~A 7'~... . ~ III ......: ~' e. ~ : C;. 0 .- · : . . r \ ~ -- . - · '-" ,. 1........ . : ':t p...y~: 0 : ~... c.~ ",Ql ~ ; ~ .. /~ ;J 0<". ~.: -:. ...CORPO,,"~..:<;')': ### S .......", ...... ....,., 7' ATE 0 ".... '..,......."," Page 7 K:\CQUNCIL\MINUTES\Temporary Minutes Work Area\CC-03-18-08min.doc A TRANSCRIBABLE RECORD OF THIS MEETING IS A V AILABLE AT EAGLE CITY HALL Page 8 K:\COUNCILIMINUTES\Temporary Minutes Work Area\CC-03-18-08mindoc Rec'c( R_ �es� urea City of Eagle LID -2007-1 March 18, 2008 Introduction E What is the LID assessment for? Allows the City to acquire, improve, and consolidate the Eagle Water Company (EWC) water system into the City of Eagle water system. The synergy derived from acquisition and combination of systems benefits all within the LID boundary. ❑ Purpose of the notice you received To give a preliminary assessment so you know what to expect. If you have any corrections, now is the time to let us know so we can make the changes. V_ (-LC LID Budget Table 2: Prosect Cost Summary LID No. 2007-1 Item Budget, $ Cost Total, $ Acquisition and Integration 6,300,000 Floating Feather PR Valve, 75,000 Included Intertie Flow and Recording Meters 50,000 Included Standby Power, Well House, #7 75,000 Included Edgewood PR Valve 75,000 Included Booster Station Pump 75,000 Included Finance and Insurance 98,000 Acquisition and Due Diligence 123,450 Engr. Report and Assessment Roll 153,000 Legal and Administration 52,700 Contingency 72,850 TOTAL 6,800,000 Table 3: Lot or Parcel Assessed Lot or Parcel with Water Meter Designated (Concept, Preliminary or Final) Building Lots x X Lot or Parcel Served by Fire Protection System X Designated Commercial Units on Designated Building X Lots Lot or Parcel with Development Potential X Lots or Parcels Sharing Water Meters for Irrigation X Table 4: Lot or Parcel Not Assessed Public Owned Lot or Parcel X Common Lots without Water Meter X Lot or Parcel Owned by Taxing District X Non -taxed Parcels (per Ada Co) without Water Meter X EWC Customers or Property Outside City Limits X Landscape Lots Served by Pressunzed Irrigation X System Table 5: Lots or Parcels Benefited CITY OF EAGLE Current Customer Lots or Parcels Vizcaya Subdivision Vizcaya Subdivision Parcel No. 50504110300 S0504142200 Lot Subtotal Total 1,321 12 19 1.352 EAGLE V ATER COMPANY Current Customer Lots or Parcels 3 062 Arbor Ridge (prelim) 50510131390 42 Arbor Ridge (prelim) 80510427375 49 Arbor Rdge (prelim) 50510427835 7 Amnia Mountain Est. (concept) S0510438450 24 Eagle Gateway (prelim) 50515223365 6 Eagle Gateway (prelim) 50515223360 5 Eagle Gateway South (prelim) 50515325550 64 Eagle Gateway South (prelim) 50515233420 9 Eagle Gateway South (prelim) S0516142300 2 Eagle Gateway South (prelim) 50516142250 4 East Plaza Dnve Sub (concept) 50518212425 2 Lonesome Dove Subdivision (prelim) 50516141911 49 Lonesome Dove Subdivision (prelim) 50516741827 113 Lonesome Dove Subdivision (prelim) 50516131780 44 Tenazza Subdivision (prelim) 50518244400 66 Lots from Appendix E, Undeveloped Properly 23 3,571 C\°\* NON4IUNICIPI(Fire Protection Only) ✓� Current Lots or Parcels 760 760 ) �l i TOTAL LOTS OR PARCELS 6,683 of Record or Designated by Property Owners Method of ERCs Used to Assess Table 6: Conversion of Meter Size to Equivalent Residential Customers (ERC) Meter Size (inch) ERCs 5/8 1.00 5/8 x % 1.00 '/. 1.00 1 1.78 1-1/2 4.00 2 7.11 3 16.00 4 28.44 "ABC Development" Commercial Building Commercial Building Commercial Building Cineplex, seating 1,800 TABLE 8: Retail, Office, and Cineplex Equivalent ERCs Example Square Feet Est Meter Size Equivalent (inch) ERCs Less than 10.000 1.00 1 78 10.001 to 20.000 1.50 4.00 20.001 and greater 2 00 7 11 28,000 2 00 7 11 Table 7: Distributed Irrigation Benefit Example "ABC Subdivision" Equivalent Residential Customer (ERC) 30.00 7.11 30 Building Lots 2 -inch metered irrigation service ERC Assessment per Lot 0.237 (7.11 ERC divided by 30) 75% 0-7036 Deduction Deduction for Pudic Undeuelop- ROW able Land 0.85 1.00 0.85 1.00 0.85 0.70 • 0.65 0.70 0.85 0.70 085 1.00 . 0.85 1,00 085 1.00 0.85 1.00 Future Parcels/Empty Lots: Appendix E Para) No. Acres Service Address Owner 4 $0510325800 7.199 200 N Edgewood Ln R-3 Patrick Towne 5 30509449402 7 940 103 N Edgewood 111. R-3 Donald Crawford 6 50508427925 7 340 459 N Cobblestone Ln R-2 Curtis Hutson 7 S0508136100 3 579 N Cobblestone Ln R-3 Curtis Hudson 8 00508427940 7 550 479 N Cobblestone Ln R-3 Leslie St,burek 9 50508244605 16 000 W State St R-3 South Sixty LLC 10 30508314800 26.370 W State SI R-3 South Slaty 1.1.0 11 50508325405 10 199 W State 51 R-2 South Sixty LLC 12 50508438550 4 630 701 W Cowman et R-4 Ray Mathie Mixed Use 13 S0515449150 22 600 2755E Slate 5t MU 014 Castle MMG Inc 14 50515428050 75 736 2755E State St MU 014 Castle MMG Inc 15 50515314900 6O 509 2401 E State St. MU Kaldenberg 16 00515315000 5 000 1955 E McGrath Rd MU Kaldenberg 17 50515131303 2 953 2500E State 51 MU Ord Castle MMG Inc 16 00515244500 17 229 2401 E Slate 5t MU Kaldenberg 19 00509417205 26 561 177 N Edgewood Ln MU Patnck Towne' 20 30509438700 3177 933 E State St. MU Montague-Sauriol LLC 21 50507449300 7 300 1601 W State 51 MU Fred Kunkle, 0.83 0.83 0.83 0.83 083 0 83 0.83 0.83 0.83 0.40 0.30 0.60 1 00 1.00 1.00 1.00 1.00 1.00 Remain Parcel Acle 6 12 6.75 4 37 2 13 4 49 1360 2241 8.67 3 94 750 18 86 3013 4 15 2 45 14.30 22.05 264 606 15% Deduction for Open Syr5 0.85 085 0.85 0.85 0.85 085 0.85 0.85 0.85 0.85 0.85 0.85 085 085 0.85 0.85 0,85 18% Net C Plan Allowable Deduction Parcel Zoning Res Unds Ave Zane ,I Aasrgned TNaeslpy� 00 zone{(l . , desj a5on i Lots'E2 Cs 5 74 R-33 93 000 0.72U 12 4 3 71 R-2 200 0.72 5.3 1 81 R-3 300 072 ' 3 9 3 82 8.3 300 D.72 8 2 11.56 R-3 300 0.72 25 0 19 05 8-3 3.00 0.72 41 2 7.37 8-2 200 0.72 10 6 3 35 R-0 400 0.72 9.6 127 5 638 MO 700 16.03 MU 700 25.61 MU 7.00 353 MU 700 208 MU 700 12 16 MU 700 18.74 MU 700 224 MU 700 515 MU 700 0.72 0.72 072 0.72 0.72 0.72 072 0.72 0.72 32 1 80 8 129 1 17 8 10 5 61 3 944 11.3 26 0 4633 17% 10% 50% 77% Deduction Deduction Remain Deduction Deduction Net Retail Ames to ERCs per for Public Undelelop- Parcel for Business for Building or Vice 100 000 100,000 Assigned Business Park - averaged uses ROW able Land Acres Park Construction Space Ac Sauare Ft waft ERCs 22 50510427450 18 766 N Horseshoe Bend Rd BP Bruce Andrew Paterson 0.83 0.90 1402 0.50 0 23 1 61 70 223 21.74 15 3 23 50510449400 27 129 9755 N Horseshoe Bend Rd BP Stahl Revocable Trust 0.83 0.90 20 27 . 0.50 023 233 101,517 21.74 22 1 Notes 1 Assignment of Use or Zone is based on the Eagle Comprehensive Plan or Zoning designation 2 Assignment of Mixed Use Density of 7lERCsyacre is based on review of Eagle Gateway South and Lonesome Dove developments 3 Deduction for Undelelopab)e land includes ltoodway, panned Nghway expansion, and topographic constraints 4 8P (Business Park) designation may includes a wide ranged peimrtted and CU potential uses A 50% deduction factor is employed to reflect an approximate medan value for ERCs 5 Deductions are based on an average or recent submittals inducing Eagle Gateway. Eagle Gateway South. Lonesome Dow Plaza Dme East. and several resrdentat subd4sions 37 3 Total ERCs From Undeveloped Lands without Concept Plans 628.1 0 Formulas Water Service Benefit for Domestic Use The domestic capacity assessment is based upon the total number of ERC's. The following equation will be used to determine how the total proportion of cost will be divided per ERC. residential / Commercial = 1 ($5,535,766)= $808.54 6,846.6 System Access and Fire Protection Benefit The fire protection benefit is based upon the total number of assessed parcels within the LID boundary. The following equation will be used to determine the fire (emergency) proportion of cost per parcel. Fire= 1 ($1,264,234)= $195.99; 6,450.5 Summary — Table 12: Typical Assessments Meter Connection Size % inch meter or less 1 inch meter 1 1/2 inch meter 2 inch meter 3 inch meter 4 inch meter Assigned Development Properties. Appendix E Non -connected, Fire Only Properties Designated Development Properties Meter Size Equivalent Domestic Converted Residential Assessment to ERC Customers 1.00 4,120.0 $808.54 1.78 90 8 $1,439.20 4.00 468.0 S3,234.16 7.11 647.0 $5,748.72 16.00 128.0 S12,936.64 28 44 85 3 $22,994 88 NA 679.7 $808.54/ERC NA NA NA Access & Irrigation Assessment Fire Component, not including if applicable Appendix F $195 99 $195 99 $195.99 $195.99 S195 99 $195.99 $195.99/ERC $195 99 Appendix F $1,004 53 Appendix F $1,635.19 Appendix F S3,430 15 Appendix F $5,944 71 Appendix F $13,132.63 Appendix F $23,190 87 NA $1,004.53/ERC NA $195.99 NA 627.8 $808.54/ERC $195.99/ERC NA $1,004.53/ERC Payment Options Component Full Benefit One Time Assessment Including Annual Payment if Paid Over 20 Assessment Reserve Years Domestic $ 808.54 Irrigation 25.87 Fire Flow/Access 195.99 TOTAL Component IFire Flow/Access I TOTAL $1,030.40 $1,133.44 $88.00 to $95.70 Fire Flow Access Benefit One Time Assessment $195.99 $195.99 Assessment Including Reserve $215.99 Annual Payment if Paid Over 20 Years $16.74 to $18.22 Questions? FrequentlyAsked Que stions City of Eagle Public Meeting March 18, 2008 /.T7 S1aJ N `Wit What is the LID assessment for? ❑ Local Improvement District No. 2007-1 (the "LID") was created by Ordinance No. 571, adopted on Oct. 24, 2007. The LID allows the City to acquire, improve, and consolidate the Eagle Water Company water system into the City of Eagle water system. What was the purpose of the notice you received? Is it a bill? ❑ Since you were identified as a property owner through county records, a "Notice of Hearing on Confirmation of Assessment Roll" was sent to tell you of the public hearing on the proposed assessment for your property. The notice includes the amount of the proposed assessment for your property and information about payment options. The purpose of the notice is to help you understand the proposed assessment. The amount given in the notice is a preliminary amount that may be adjusted after the City holds a Public Hearing and considers all the testimony presented. ❑ THIS NOTICE IS NOT A BILL. 3 Was the assessment based on the size of my house or size of my lot? ❑ The domestic component is based on the potential demand that can be placed on the water system as determined by the size of the water meter. How is the assessment amount calculated and what is the annual cost? ❑ In summary, the City Engineer calculated the overall cost of the improvements and allocated that cost to each lot or parcel of property based on the benefit to the property. o The Engineer Report, prepared by the City Engineer, explains how the proposed assessments were calculated. The Report is available on the City's website at www.cityofeagle.org and at the City Hall. Assessment Calculations cont... ❑ The assessment for domestic water use reflects the standard 3/4 inch Equivalent Residential Customer (ERC) water meter size. One single-family residence equals one ERC. All properties currently served or planning to use domestic water were allocated a cost based on being an ERC. ❑ Properties that benefit from fire protection were also identified and assigned a proportional cost based on a percentage of water capacity necessary to meet a fire flow of 1,500 gallons per minute. If a property is using potable water for irrigation, it was assigned a proportional benefit for irrigation water. Assessment Calculations cont... ❑ An example assessment for a property benefited by water for domestic, fire protection, and irrigation usage breaks down like this: Component Domestic Irrigation Fire Flow/Access TOTAL One Time Assessment Annual Payment if Paid Over 20 Assessment Including Reserve Years $ 808.54 25.87 195.99 $1,030.40 $1,133.44 $88.00 to $95.70 7 What if I want to pay the assessment immediately and not have annual payments? ❑ You will have the option to pay the assessment within 30 days of the final assessment roll being adopted by the Council. ❑ If you do so, you would pay a one-time cost of the amount listed under the principal assessment column. You also have the option of paying installments over time, as shown above and explained below. ❑ If you make the one -tune payment, you will not have any annual assessments. 8 What if I wish to pay the assessment over time? ❑ All immediate one-time payments will be applied to the cost of the project. The City will then borrow any remainder needed to pay for the project, including the cost of funding a reserve fund as required by the lender. ❑ The reserve fund amount will not exceed 10% of the amount of the City's loan. ❑ The assessment amount plus the estimated 10% reserve amount would be $1,133.44 based on the foregoing example. 9 What if I wish to pay the assessment over time? Cont... ❑ If you choose not pay your assessment in the first 30 days, you will receive an annual assessment over 20 years which will include a 1% administrative fee. Using the above example, the annual payment would be $88.00 to $95.70 per year, depending upon the interest rate on the City's loan. The interest rate cannot be determined until the amount of the loan is known and the City issues its LID Bond. 10 What would my payment be if I only received a fire flow/access assessment? ❑ For those property owners that received a preliminary assessment notice for Fire Flow/Access only, the one time assessment would be $195.99 in the example below. ❑ If the property owner preferred to pay over time, they would receive an annual assessment of $16.74 to $18.22 using the example below, again depending upon the interest rate of the LID Bond. 11 Assessment Example — Fire Flow/Access IComponent IFire FlowlAccess I TOTAL One Time Assessment Including Annual Payment if Paid Over 20 Assessment Reserve Years $195.99 $195.99 $215.99 $16.74 to $18.22 12 Will I get a water bill in addition to the assessment? ❑ Yes. The LID is to acquire, improve, and consolidate the privately owned Eagle Water Company into the City of Eagle system. There will still be a cost to operate and maintain the system. Water service revenues will not be used to pay off the LID. Water service rates will reflect the cost of providing service such as meter reading, repair, maintenance, and care of the water system. 13 Will water service revenues be used for other City projects? ❑ No. Water service revenues cannot be used to fund City projects other than the water system. The City cannot use water service funds, for example, to build parks, streets, or create a performing arts building. Monthly water rates will be reviewed every year to ensure they are appropriate for the service. I am billed by United Water, but I received an assessment notice. Why? ❑ There has been some misunderstanding that property owners in the Brookwood, Lexington Hills, Feather's Nest, and Trail Creek subdivisions are being served by United Water. United Water is only the contract operator of the City's water system and handles the billing of these customers for the City's system. These City customers are paying lower City service rates charged by the City, not the higher United Water rates for service provided by United Water. ❑ When the City and Eagle Water Company systems are consolidated, the City's water service rate will be charged to all users. 15 Is the purpose of this acquisition to get water for developments in the foothills? ❑ No. Contrary to rumor, acquiring Eagle Water Company is not about water for foothills development. Under the City's ordinances as demonstrated by Legacy and Eaglefield subdivisions west of Linder Road, developers are required to acquire water rights, construct wells, construct water lines with hydrants, and if necessary construct storage reservoirs, then turn the system over to the City for ownership and operation. o Developers such as M3 and Avimor are investigating acquiring and developing necessary water for those developments. 16 Can I reduce my meter size and thus reduce my assessment? ❑ Some property owners have larger meters and thus will pay larger assessments. If the meter size is reduced prior to the adoption of the assessment roll, thereby limiting the water demand placed on the system, the assessment can be adjusted for the smaller meter. However, if the meter is increased in the future, a new meter cost based on increased capacity for use will be charged reflecting the increase in meter size. 17 Will the City increase the assessment? ❑ In the Notice, there is reference to a potential for a proposed assessment to increase up to twenty percent (20%). Idaho law provides for adjustment of assessments based upon the input from the public at the hearing, without having to start the notification process over. ❑ For example, if the assessment for one resident is modified because they demonstrate they are not benefited in the amount proposed, the assessments to the balance of properties may change. ❑ If the change is in an amount that does not exceed 20%, the City is not required to go back and re -notify every property owner of the change. 18 Why is a 10% Reserve Fund cost added to the assessment? ❑ A Reserve Fund is a common requirement imposed by the lender as security for the City's loan. The amount of the reserve fund will be determined when the amount of the loan is known, and the City sells its LID Bond. 19 What happens to the assessment if I sell my property? ❑ LID assessments stay with the land. In other words, they are permanently connected to the land associated with the assessment. If you sell your lot or property, the assessment payments would still have to be made. However, in many instances, any remaining assessment is actually paid off as part of the closing on the property. Idaho law imposes a prepayment requirement of one -year's additional interest when assessments are paid off in full after the initial 30 -day payment period described above. 20 Who will operate the water system after the purchase and consolidation is completed? ❑ Eventually, the City will have its own Public Works Department to operate the water system. In the interim, the City has contract operators who will work with Eagle Water Company employees until the transition can be completed. It is anticipated that Eagle Water Company employees will be retained to operate the system. Local Improvement District 2007-1 � / Protests / Comments %/4;:j March 18, 2008 (Aktel(-- OcA: TAS wo 1114 /<j. -RE( Sywt-i 3v-7 N, 77c CV/ 7&-/- .?x,e/cof 001-0,1 Nlun_NItoe.- > WA, 1{y/ 1 / 2 7o Soyjy/ S)v(A44iti v EAGLE CITY COUNCIL PUBLIC HEARING SIGN—UP SHEET A PUBLIC HEARING ON CONFIRMATION OF ASSESSMENT ROLL FOR LOCAL IMPROVEMENT DISTRICT 2007-1 yk18, 2008, 7:30 P.M. t4 Pc ADDRESS/ TESTIFY NAME TELEPHONE/E-MAIL YES/NO? PRO/CON /1-1/) f) 01- '.4 L),4. 7 '10 .8.02 CI ,k.,�3 pcv r p;Kif iv v ,,• 1.,e41E 1 3?-tP0.7 TI l.0 / dliN ^--h�-r 1 Y I� 11..E _ `� t _� �� .� - _i ' . r 5^ ..L /;&4"1 /'/-L ,_ ` 4 1 i r DSL g /i7/f�"' % S / ,77ce fi1 f i4ack1J4(.1/to(le/'2:i r /7:M6ci/4a/ rit,1;-:(I)16' [J17(J%7 &a2ivnR II 1) N 6)hblP�-vrilE l,Oa U tc & ( ra10( e Ti ---0,,,j1) kw ( S S� �i. erw �� �f 1i Iia(( I C Gt741/1 P6(LS oN �3 7>7/ ie ki (AL?x'39- yo 2 (-) k_ klE C'a ni COO rs KE -.5 yes coy A' 0 c10-7 EAGLE CITY COUNCIL PUBLIC HEARING SIGN-UP SHEET A PUBLIC HEARING ON CONFIRMATION OF ASSESSMENT ROLL FOR LOCAL Ac -off 17�4Tb r1 (7 ?v -e) &,‘ NS rkR-i 1 . CO V/ 1 e r %T rel, j1e,4-. IMPROVEMENT DISTRICT 1\4.C4 rG 8, 2008, 7:30 P.M. �l b 1 n1 �vbc 'C'J CL. 93.-7-7511)0 E Car -v icTLI4 # r- , 4,t y i'1' D6Eg SiN5 1^C,, V 1 C "'.S C, C C\ M,i1GA 1,1f1 -34-y A5Pru 2_ S PIXS-7 G(\ 4-9 es v-1 D N. 1-S C( x'63 ki u cv L v s L— J (-1 5 yFs Ivo 4A.‹/Z),5teC-_' JI U/z- A/61 L ''4 c o ►.l /q`ic? l r"" s��^ MO' lJr N0 9✓ c / ;CI er1eSS r� << /(94 Is) GJ q- i c=am �1 3 —44,7 70 h o-yc,1i,34., - •- 2 ci t Stv,k, s__ �r 64-67a— 1-6 i77Qt.c G t �� (� R- 2 y� s ,?94 3 kig ( ) Ai 5111 eft— 7L L �'Ac J4 G c,,, CGv-\ EAGLE CITY COUNCIL PUBLIC HEARING SIGN-UP SHEET A PUBLIC HEARING ON CONFIRMATION OF ASSESSMENT ROLL FOR LOCAL IMPROVEMENT DISTRICT 2007-1 March uary 18, 2008, 7:30 P.M. ADDRESS/ TESTIFY 3• NAME &O Gdii ;n1 402n(1 tt_600,,e4att_. L4%/ L�LZt'v L't,� lU boif Ai;ZLS 0 STA -4--1; roLt rrS °at futC7 1 11 /{^(� JG, �)igiy(14( TELEPHONE/E-MAIL YES/NO? PRO/CON 251/ )(Cr �(s. /L'7/ N Lam' 2(dc42c ) 6 /9�� \�� 7-6 s <.:.,«...‘ 4C" e r3t/ a n 7Z -Z- weid i L-- 345 (A); L QC1 Fcc- ` 1/ 1 A Cr -E. J/Gr-i, 2 3 S Lf J . rQ1 � , �0 oc) G� 57 93c( LK1 q_3010Es L & Lf� 2rhL,n./cc,/ (7 &i[c,,. a7' AJ ,`N /F<ST3 i Or - (.21— \ 0 �E S PO A7) Il�cv Cb'J Ge Go, 11 Cod Co�l� C1. / EAGLE CITY COUNCIL PUBLIC HEARING SIGN-UP SHEET A PUBLIC HEARING ON CONFIRMATION OF ASSESSMENT ROLL IMPROVEMENT DISTRICT 2007-1 a rchl 8, 2008, 7:30 P.M. 1`f''((.. 4 ECA'°oleicI°.,€ c yc v c,1 lc 4-(41,6 c-60 404/At y Z3 2 Z AL Sim- rA4 ,e 77 ' ca' ,/44 /✓ rLFP l am-( l 2 ,67 / 5 w u,P 1t j eA-A4Ae.,tac A37 N . Pay Tor45- Afx FOR LOCAL Ctru Cu NIe /1 7/kiY. Tz see )e-5 d 5 of rte. fl4 \/17 T .l 6racw tfav s tt o, 4-1 f �h . Fred and Lois Kunkler 1601 W. State Street Eagle, ID 83616 March 18, 2008 Re: City of Eagle, Proposed Local Improvement District No. 2007-1 Assessment Roll No: C-2.37 Cc .-idr--(0 r We object to the total assessment of $26,077.60 for our home and acreage. Our property is zoned agricultural and is currently being farmed. The property uses surface irrigation water and our home is on a private well. LID 2007-1 provides no benefit to our farm ground. If our home is to be included, then it should be assessed in the same manner as the other homes that are served by private wells. If our farm ground were to be developed and require a central water system, then it is assumed the City of Eagle will have a calculated connection/buy-in fee that would be assessed at that time. We should not be required to pay thousands of dollars now for development that may never happen, at densities that can't be determined or guaranteed. The inclusion of the farm ground into the LID greatly limits our future options for this ground. The City is forcing us into a position of either selling the farm or taking the City to court to fight our inclusion into the LID. To that end, applying these arbitrary residential densities onto actively farmed agricultural ground may violate the intent of Idaho's Right to Farm laws. Please remove our farm ground from the LID 2007-1 Assessment Roll. Sincerely, .___,, 4 Fred Kunkler Lois Kunkler South Sixty Farm Fred and Lois Kunkler 1601 W. State Street Eagle, ID 83616 March 18, 2008 Re: City of Eagle, Proposed Local Improvement District No. 2007-1 Assessment Roll No: C-2.34, C-2.35, and C-2.36 We object to the total assessment of $77,077.58 for the South Sixty farm. The South Sixty farm is zoned agricultural and is currently being farmed. This property utilizes only surface irrigation water. There are no structures on the property and no need for a potable water system. LID 2007-1 provides no benefit to our farm. There are no structures on the ground and the crops have no need for fire flow protection other than what is already provided by the Eagle Fire District. Residents of Eagle are already guaranteed fire protection by the payment of annual property tax assessments to the Eagle Fire District. If our farm were to be developed and require a central water system, then it is assumed the City of Eagle will have a calculated connection/buy-in fee that would be assessed at that time. This is the only equitable way to accommodate existing farm ground. We should not be required to pay thousands of dollars for development that may never happen, at densities that can't be determined or guaranteed. The inclusion of the farm ground into the LID greatly limits our future options for this ground. The City is forcing us into a position of either selling the farm or taking the City to court to fight our inclusion into the LID. To that end, applying these arbitrary residential densities onto actively farmed agricultural ground may violate the intent of Idaho's Right to Farm laws. Please remove all the South Sixty parcels from the LID 2007-1 Assessment Roll. Sincerer ,7—e4 Fred Kunkler, Managing Partner Lois Kunkler, Managing Partner Karie Arnold, Partner Lynne Sedlacek, Partner CG dr-va Sedlacek 1200 Hereford Drive Eagle, ID 83616 (208) 939-6219 March 18, 2008 Re: City of Eagle, Proposed Local Improvement District No. 2007-1 Assessment Roll No. D-1.611 We object to the inclusion of our property, 1200 Hereford Drive, Eagle, Idaho, into the City of Eagle's proposed Local Improvement District No. 2007-1. We have a four -acre parcel of land that utilizes surface irrigation water. Our home is served by a private well. The nearest potable water distribution line is several hundred feet away. We have no way to access a central water system; therefore, the proposed LID would not benefit our property. We request our property be removed from the proposed LID. Sincerely, Ron Sedlacek jfrtS C4-gistfe09 Cc I would like to congratulate the Mayor and Council for instilling interest in local government, that is the good news. The bad news is you have bypassed the electorate and compromised public trust. Mayor Bandy, you came into office bugling from the pulpit that you wanted better communication. I think you're quickly finding out that making poor decisions will cause a lot of communication most of it NEGATIVE. You have feebly attempted to convince us that the purchase of EWC was a "good deal". If it was such a good deal then certain questions demand answers: Voter's in this LID have the RIGHT TO KNOW: 1. WHY wasn't the Eagle Water Company (EWC) given a formal appraisal?? Instead, the accounting firm Cooper Noonan GAVE AN OPINION and their "premise" was based on whether it was "affordable" for those in the LID. They even admitted it wasn't an appraisal (they called it a "sanity check"). "Sanity checks" do not even remotely resemble an appraisal. There are no Kelly Blue Books for water companies ---HOWEVER there are clearly documented appraisal methods which you did not follow. You hoodwinked the public into thinking the EWC was correctly valued. It wasn't. A very important paper by David L. Hayward should be read by every one of the Council and Mayor. It is called "Water Utility Valuation: Beyond the Dartboard Approach". It is tragic and irresponsible that you took a dartboard approach to evaluate EWC. I will provide you with documentation to evaluate water utilities if you call my office. 2. Isn't it coincidental that the owner of Eagle Water Co. donated $1000 to then Councilman Bandy the day before the Mayoral runoff election? This would seem to be a conflict of interest. 3. WHY isn't the PURCHASE AGREEMENT with EWC a public document?? 4. EWC has deficiencies ---what is the cost to upgrade?? WHO pays? Why was a Purchase Agreement made for a substandard system?? 5. Why wasn't the engineering report audited? Engineers fix things but they are not appraisers. The preliminary budget is based on false information ---namely the "purchase price of Eagle Water Co" 7. Kudos to Councilman Semanko who is the only one who advised the rest of you to put this issue before the voters and not pass an LID. In closing, FACTS DON'T CEASE TO EXIST BECAUSE THEY ARE IGNORED The people of the LID deserve more than what you are telling them. You should put this entire matter in the voter's hands after you have done the proper homework. Water Utility Valuation: Beyond the Dartboard Approach David L. Hayward, MS, CRRA Introduction Valuation analysts with experience valuing a wide range of companies in non -price regulated industries such as auto, restaurant, and retail clothing may have a very difficult time applying their experience and skills to regulated utilities and, in particular, to the water utility industry.' This problem of transferring experience is similar to that of a dentist performing brain surgery. While the dentist has a medical background and training (and may be considered a good dentist), the application of his or her skills is not necessarily appropriate in the context of brain surgery. The unique environment of regulated water utilities is exacerbated given the dollar magnitude involved in a water utility valuation. For instance, for large investor-owned water utilities (Class A-1), average assets are in the range of $360 million.2 3 In contrast, the restaurant industry (other than fast foods) has approximately $.5 million in average assets. In the water utility industry valuation mistakes or shortcuts could cost a client MEGA dollars. For instance, in one of our4 valuation assignments - the valuation of the assets of Westpac Utilities (a large water utility located in northern Nevada and owned by Sierra Pacific Resources, Inc.)5 - overlooking an arsenic problem would have resulted in a serious mistake. While it was difficult for the utility to estimate the total cost of fully complying with the arsenic regulations in the Safe Drinking Water Act (SDWA), one estimate was up to $30 million.6 In this case, Westpac had $250 million book value of net plant. In our valuation study, we utilized eight different methods. Two of those commonly used approaches yielded results of (a) $213.6 million (discounted cash flow or DCF), and (b) $314.5 million (capitalized earnings). The ' The comments in this article pertain primarily to business valuations in the context of mergers and acquisitions. 2 The National Association of Water Companies (NAWC) groups investor-owned water utilities into four classes: (a) Class A-1 are utilities with gross annual revenues of $10 million or more; (b) Class A-2, gross revenues of $5-10 million; Class A-3, gross revenues of $1-5 million; and (d) Class A-4, gross revenues of $1 million or less. 3 Many of the issues and commitment of resources for a water utility valuation are the same regardless of utility size. 4 In this paper, the words "HCG," "me," "firm," "we," "I," "our," and "my" are used interchangeably. 5 David L. Hayward, "Confidential Valuation Report For NV Nuon — Westpac Utilities," (Leucadia, CA: Hayward Consulting Group, 2000). HCG's assignment was to value the assets including using a DCF approach. Listing the project's valuation -related issues required 11 pages. Lehman Brothers, "Information Memorandum Regarding the Sale of a Water Business: Sierra Pacific Resources," (New York: Lehrman Brothers, September 2000), p. 38. 1 significance? Approximately $101 million differential! The low end of our recommended value was $213 million, partially because the utility had a long history of under -earning its authorized rate of return. (This recommended value was later informally confirmed by another large investor-owned water utility interested in purchasing the assets.) The assets were eventually sold to a newly -formed government entity for $350 million. Thus, we saved our client $37 million had they paid book value and even more (i.e., $137 million) had they paid the full sales price. With respect to the $101 million range, referenced above: What would your banker say if you paid the higher amount by using a simple approach such as capitalized earnings? Bankers and equity investors want and require substantive analysis - not something superficial such as capitalized earnings or "comparable sales." Bankers who loan money to water utilities want to see, among other filing requirements, pro forma financial statements as well as capital/operating budgets for the next five years.' Why would you, the client, want a valuation study that cannot even assist you in securing various forms of capital? Also, assuming that you are a potential buyer; can you sleep at night knowing this difference? This second point is particularly true if you are a purchaser paying the higher price (above book value) and not knowing if your company can recover the premium from its ratepayers.$ The preceding example illustrates how performing a thorough analysis can save a client a significant amount of money. That range of values confirms what (in a different utility project) another client of ours said about the importance of a thorough valuation: "... if we don't get a (sic) expert valuation then we are pretty much guessing as to whether this is a great, a goon a fair, or a not -so -good purchase as currently presented "9 (Emphasis added) Mr. Steve Gustafson, Vice President, CoBank, October 15, 2004 e-mail to David Hayward. In addition to the preceding information, Cobank, for example, requires the following information in support of a loan: (a) 3 years of audited financial statements; (b) The current year and interim year financial statements; (c) The current year operating budget; (d) A copy of the utility's last rate case; and (e) The utility's rate application, if applicable. 8 In the utility business, the difference between the price paid and the book value of the assets is called an acquisition adjustment. 9 Mr. Eli Castronova, project manager, October 19, 2004 e-mail to Ms. Judy Windisch with respect to the proposed acquisition of Johnson Utilities (a water utility in Arizona). 2 This quote was so "on point" that, during my utility valuation seminars, I used a dart and a dartboard to illustrate the questionable usefulness of various utility valuation studies that I had seen. After interviewing numerous professional consultants in the water utility industry, and recognizing that superficial valuation results were not useful, another of our clients finally concluded: "There are no reliable shortcuts that can be used to assess the acquisition value and 'go prospective future value of a multi -faceted utility company... The remainder of this article provides: (a) an overview of the regulated water utility industry; (b) discussion of the differences between the water utility and other industries; (c) critique of common valuation approaches in the context of the utility industry, and (d) A unique valuation model — FinMod, Copyright ® 2005 by Hayward Consulting Group, all rights reserved - which allows an analyst to value a water utility using up to 12 valuation approaches." Overview of the Regulated Water Utility Industry Today, more than 50,000 water systems exist. Eighty-four percent of those systems serve less than 3,300 people each.1213 In general, the water utility industry is too inefficient. For example, less than 1% of the water systems serve more than 100,000 people each.14 For this reason, most utilities have been unable to achieve economies of scale or scope necessary to actually maximize their individual performance. Throughout the U.S., the water utility industry is a patchwork of thousands of privately -owned and government-owned water systems. The majority of water systems are government owned. 1° Mr. Donald L. Meyers, President of Aspen Enterprises, LLC, August 19, 2004 letter to Mr. Conley Wolfswinkel, Vistoso Partners regarding the acquisition of Johnson Utilities. " FinMod can be obtained from the National Association of Water Companies (NAWC). Their web site is: 12 Mr. Nicholas DeBenedictis, Chairman and CEO, Aqua America Inc., presentation, National Association of Water Companies 2004 Annual Conference, La Quinta, California, October 2004. 13 The EPA's definition of a small water utility is 3,300 customers or fewer. 14 Op. Cit. 3 For investor-owned water utilities, two very different categories exist. The first category consists of publicly -traded companies. The second category includes thousands of smaller non - publicly traded companies which in many cases are family-owned- and- operated businesses. Typically, these smaller water utilities evolved from land developers for whom the water business was not their primary interest. Furthermore, this group has little experience, if any, in the utility regulatory process. For the past several years, the water utility industry has been experiencing a consolidation phase.'$ In the pre -consolidation phase, 23 U.S. based investor-owned water utilities were publicly traded. Today, the number has declined to 11. The business plans of several large investor-owned water utilities are based upon growth through acquisition of smaller water systems (e.g., Aqua America, Inc.). A clear consensus among experts in the water utility industry includes: 1. Water rates do not reflect the true costs of providing service, or the value of service. In addition, concerning household income, Americans pay 0.5% for water and wastewater services as compared to 2%-5% for other utility costs.'6 Thus, on the basis of the "affordability" argument frequently used by regulators and other stakeholders, water rates could be increased substantially. 2. The capital requirements for rehabilitation, growth, and meeting environmental standards are enormous. According to Mr. Jeremy Pelczer, President and CEO of American Water, approximately $ 1 trillion of capital investment requirements is needed over the next 20 years.' 7 In some cases, water utilities face a 225 year 15 The consolidations include the takeover of government-owned water systems by investor-owned water utilities (IOU) referred to as privatizations; or the takeover of IOU water systems by a government entity referred to as municipalization. 16 Testimony of Mr. Donald L. Correll. President and CEO of Pennichuck Corporation, The Subcommittee on Environment and Hazardous Materials, and Committee on Energy and Commerce, United States House of Representatives, July 22, 2004. 17 2005 NAWC Water Policy Forum. "Summary Report." (Washington: National Association of Water Companies, April 2004), p. 10. 4 replacement cycle.18 In addition, as of September 2003, one-third of U.S. surface waters do not meet water quality standards.' 9 3. Some utility regulators are overly cautious about authorizing full rate increases for water utilities even though the water utilities' proposed rates do not allow them to fully recover their costs. 4. The public believes that water is a "free good" and suppliers (i.e., water utilities) should provide service that is either free or very inexpensive.20 In the U.S., in terms of rates and service, the investor-owned water utility industry is regulated, for the most part, by individual state public service commissions (PSC) or public utility commissions (PUC). Usually, these commissions have been awarded power to regulate utilities by their state legislatures. Some states regulate hundreds of water utilities. For example, in Arizona, the Arizona Corporation Commission (ACC) regulates approximately 400 water utilities with 300 owners. Typically, the scope of a PSC's regulation encompasses: 1. Setting tariffs (i.e., establishing prices and terms of service); 2. Transferring ownership. (State PSCs have different tests used to evaluate utility mergers and acquisitions. In most cases, the PSCs must find that the merger is "in the public interest.") 3. Approving financing; 4. Establishing accounting policies; 5. Issuing Certificates of Public Convenience and Necessity (CCN);21 6. Ensuring safety; 7. Specifying reporting requirements; and 18 Janice A. Beecher, Ph.D. "Mandatory Takeover Policy," Sourcebook of Regulatory Techniques for Water Utilities, (Washington: National Association of Water Companies, 2003), Chapter 3.1. 19 Melissa J. Stanford, "Replacing and Securing Water Utility Infrastructure," (Columbus, OH: The National Regulatory Research Institute, February 2004), p. 6. 20 David L. Hayward, ValuingA Water Utility, (Leucadia. CA: Hayward Consulting Group, 2000), p. vi. This is a very common belief in developing countries where the public believes the government should provide all utility services at low cost if not free. In the United Kingdom, a country that is dominated by nine regional water systems, critics of Margaret Thatcher's privatization polices said: "Look she's even privatizing the rain which falls from the heavens." Thatcher's response was: "The rain may come from the Almighty, but He did not send the pipes, plumbing, and engineering to go with it" 1 State agencies must have U.S. EPA approved procedures in place that prevent certification of new, non-viable systems or a portion of their State Revolving Fund could be withheld. 5 8. Authorizing diversification. Many people believe that the utility business is nearly a "risk-free" business and that utilities are guaranteed a profit. This belief is simply wrong. Bankruptcies of huge utilities such as Pacific Gas and Electric Company, El Paso Electric Company, and Public Service Company of New Hampshire result in major news headline coverage and document that the utility business is not risk free. Unfortunately, many small water utilities around the U.S. have filed for bankruptcy. Hundreds of others are experiencing serious financial trouble.22 To further emphasize that water utilities are not necessarily money -making machines, a General Accounting Office (GAO) study reported: "...more than half of the utilities whose revenues from user charges and local sources did not provide sufficient funds to cover their cost of providing service, raised their rates only two times or fewer between 1992-2001."2"' Finally, for the two smallest classes of water utilities (as defined by NAWC), the actual earned rate of return on equity (ROE) for the period 1975-1997 was 3.2% and 1.8%.24 One possible explanation for these low ROE numbers is that many small water utilities are created by land developers who are more concerned about selling land than earning a reasonable return for the water utility. We have experience with many small water utilities that have never paid a dividend and have plowed most, if not, all of their excess earnings back into the utility. In addition, small water utilities may be more interested in avoiding income taxes than showing a profit since they have few, if any, shareholders that are interested in the utility's quarterly earnings per share. Perhaps one of the most troubling issues currently facing the water utility is meeting the Environmental Protection Agency's (EPA) new arsenic requirements.25 By January 2006, water utilities must reduce their arsenic levels from 50 parts per billion to 10 parts per billion. Some 22 The data regarding the financial condition of investor-owned water utilities is difficult to find. See, Janice A. Beecher, Ph.D.. G. Richard Dreese. Ph.D., and James R Landers, "Viability Policies and Assessment Methods For Small Water Utilities," (Columbus, OH: The National Regulatory Research Institute, 1992), pp. 42, 184. 23 "Replacing and Securing Water Utility Infrastructure," p. 5. 24 David L. Hayward. ValuingA Water Utility, Appendix D, p. 10. 25 The EPA sets maximum contaminant levels (MCL) for 87 substances. 6 states agencies such as the California Public Service Commission (CPUC) have the authority to impose even stricter limits.``' In some states, utility regulators do not know how many water utilities will actually comply with this standard. For example, one of our clients in Arizona has eight wells out -of -compliance with an estimate of $200,000 per well needed to bring them into compliance. (This is a utility that, as of 1996, had approximately $4 million in net plant in service.) A final major issue relates to security costs. The Bioterrorism Response Act of 2001 requires every public water system serving over 3,300 people to prepare Vulnerability Assessments (VA) of their critical assets.27 For some water utilities these costs have been substantial and may not have been fully recovered in rates. In conclusion to this overview, the water utility industry is the only major utility industry in which: Partial deregulation has not occurred; 2. The product is ingested; and 3. The primary raw material (i.e., water) is "free." 4. Small water utilities: (a) are regarded as inefficient (i.e., little or no economies of scale); (b) have a disproportionate number of environmental violations; and (c) lack financial and operational expertise.28 What is Different About Water Utilities Regulated By State PSCs? For the most part, the U.S. investor-owned water utility business is called a "cost-plus business." Most states' PSCs allow regulated water utilities to recover their "prudent" expenses plus a reasonable rate of return on their "prudent" and "used and useful property" (i.e., rate base) necessary to provide non-discriminatory service to the public. The definition of rate base may vary by regulatory jurisdiction but usually includes: utility net plant and equipment plus 2 6 Southwest Water Company 2004 Annual Report, p. 9. 27 Connecticut Water Service, Inc.. 2004 Annual Report. p. 17. 28 Mr. DeBenedictis 2004 NAWC presentation. 7 prepayments, deferred credits (occasionally), inventories, materials and supplies, and cash working capital; minus customer advances for construction, customer contributions in aid of construction (CIAC),29 customer deposits, investment tax credits (ITC), and accumulated deferred income taxes. The water utility industry differs from other industries with respect to three major categories. These categories are: • Regulatory/legal environment • Accounting issues • Economic issues Table 1 identifies some major differences between the water utility industry and other industries (in this particular case, the retail clothing industry). Comparisons of the water utility industry with other non-regulated industries would provide many of the same conclusions and should be considered. 29 Customer advances and CIAC are either assets or money contributed by (usually) a developer to the utility. Some of these contributions may be returned to the developer under various conditions. 8 Issue Accounting standards Fixed Assets Prices Public Policy Leverage Inventory Valuation Quality of Earnings Stock & Bond Prices Competition Risk Deferred Assets Inflation Earnings Sales Growth Legal Exposure Barriers To Entry Weather Table 1 Comparison of Water Utilities and Retail Industries Water IOU PSCs set High Regulated Very important High Limited importance Potentially important Highly correlated Usually none 1/ Low Beta (ave. of .56) Potentially important Potentially a big problem Very cyclical 3/ Usually very limited Very high Very high Very important Retail Clothing GAAP Low Non-regulated NA. Low Potentially important N.A. Low correlation Very high High Beta (1.3) N.A. Not major Potentially cyclical Not limited Usually not major Low Usually not significant Source: David L. Hayward, Valuing A Water Utility, (Leucadia, CA: Hayward Consulting Group, 2000), Chapter 1, p. 14. Notes: N.A. — Not applicable 1/ Competition for bottled water, some contestable markets 2/ Clothing,; 3/ Throughout the year 9 Regulatory/Legal Environment A utility's regulatory/legal environment (e.g., EPA; state health agencies; PSC; federal, state, and local laws; etc.) wields perhaps the most influence over a utility's risk. A regulatory environment (broadly defined as laws, rules, and regulations) can either encourage or discourage investment in the water utility industry. The Value Line Investment Survey frequently comments on the impact of regulatory decisions on a particular water utility. The regulatory environment contains a variety of uncertainties including, but not limited to a commission's authorized rate of return, rate increases, expense recovery, policies, and legal actions.30 A key risk associated with a regulatory environment (sometimes referred to as "climate") includes the continuity and predictability of commissioners and commission staff. In addition, a water utility may be regulated by two or more state PSCs - increasing the difficulty of its valuation. In utility regulation and valuation work in developing countries,31 HCG has witnessed significant problems related to a country's basic infrastructure utilities (i.e., electric, natural gas, and water utilities). These problems include, but are not limited to, rolling blackouts; chronic shortages; utilities with serious cash deficiencies; and utility regulatory environments that are uncertain at best and, in some cases, non-existent. The bottom-line result of these problems is environments that do not attract the necessary investment capital (particularly from outside the country) necessary for economic development and growth. The water utility industry in the U.S. faces similar problems. These problems are sometimes referred to as the "funding gap." The funding gap represents the shortage of capital necessary to fund investment projects. In profitable industries, this gap usually does not exist because the return on investment for the industry is sufficient to attract the necessary capital. Cost of capital. In utility rate proceedings, because the expected return on common equity for a water utility cannot be observed and must be estimated, a PSC usually has a great deal of discretion as to cost of capital used in setting a particular utility's rates. Throughout the 3° In April 1998, the Arizona Corporation Commission in Decision No. 62993 established a "Task Force" to study the problems in the water utility industry and provide possible regulatory solutions. As of the date of this article, the docket remains open and without a conclusion_ 31 These countries include: Armenia Bolivia, Czech Republic, Egypt, Guyana, India, Pakistan, the Philippines, Poland, and Serbia -Montenegro. 10 U.S., commission -authorized rates of return on equity for water utilities can range significantly (e.g., 13.65% in California to the 9%-10% range). In order for a water utility to be eligible for funds from the Drinking Water State Revolving Fund (DWSRF), it must have the financial capability to maintain SDWA compliance.32 In cases where subsidized debt is available (Value Line notes that "...local and federal funds appear to be depleted"),33 water utilities may wait a long time to get the funds. For example, in 2002 the California Department of Water Resources approved San Jose Water Company's application for a loan of approximately $2.5 million from the Safe Drinking Water State Revolving Fund (SDWSRF). As of mid 2005, San Jose Water Company still had not received those funds.34 Some experts in utility finance believe that water utilities' cost of capital for ratemaking purposes is too low given the risks (particularly true for small water utilities). For example, in January 2005 the overall rate of return on rate base (using a combination of debt and equity) for large water utilities in Arizona was approximately 7.2%.3$ Also in January 2005, the cost of subsidized debt from the Water Infrastructure Finance Authority of Arizona (WIFA) started at approximately 7.25%. (WIFA administers funds from the Clean and Drinking Water Revolving Funds.)36 Rate Increases. A proper utility valuation study should account for potential rate increases. In other industries, the owners or managers have significant control over the timing and amount of price increases. This is not true for regulated utilities. Because utilities operate in a political environment, the ultimate pricing test is frequently the willingness of regulators to authorize rate increases. As previously mentioned in this article, water utility owners/managers have been reluctant to file for rate increases even though the utility's rates are not covering costs. In many cases, the approval (by regulators) of utility mergers and acquisitions are conditioned 32 David W. Wirick, John D. Borrows, and Steven Goldberg, "Evaluating Water Utility Capacity With Ratio Analysis and Discounted Cash Flows," (Columbus, OH: The National Regulatory Research Institute, 1997), p. 3. 33 The Value Line Investment Survey, April 29, 2005, p. 1420. 34 SJW Corp., 2004 Form 10-K, p. 20. 35 Interview with Mr. Steve Olea, Assistant Director, Utilities Division, Arizona Corporation Commission, Phoenix, AZ, January 26, 2005. This was the rate for Class A, B, and C water utilities. 36 Mr. Jay R. Spector, Executive Director, Water Infrastructure Finance Authority of Arizona, "Valuing Your Water Utility Conference," Phoenix Arizona, Crowne Plaza Phoenix Airport, January 8, 2005. (This rate was derived by adding a 2% premium onto the prime rate, then 5.5%.) 11 upon the new utility avoiding a rate increase for a specified period, sharing future profits, or cost savings," or perhaps even lowering rates. Finally, regulators generally try to show ratepayers that they are deriving some benefit from the merger (e.g., lower or more stable rates, better service, etc.). Reaulatory adjustment mechanisms and policies. Since, generally, the mid 1990s and some times before, many state PSCs implemented various regulatory mechanisms intended to reduce the risk of investor-owned water utilities. Many such mechanisms were designed to allow the utility to recover expenses and capital investments more quickly than under normal utility regulation. Examples of regulatory adjustment mechanisms and policies include: 1. Purchased water and power adjustment clauses; 2. "Nonviable"38 water utilities acquisition incentives; 3. Distribution system improvement charges (DSIC); 4. Construction Work In Progress (CW1P), and excess plant capacity allowances in the utility's rate base; and 5. Revenue adjustment mechanisms between formal rate cases. Clearly, a valuation analyst should consider rather than overlook these regulatory policies in that they have clear implications on a water utility's value. Leal issues. In addition to the normal legal issues any company faces, in recent years investor-owned water utilities have been subject to "wrongful death" lawsuits. Southwest Water Company and other water utilities were sued in several water quality lawsuits dating back to 1997. In August 2004, a Los Angeles Superior Court Judge dismissed the charges.' Some water 1999 NAWC Water Police Forum. "Regulatory Incentives for Consolidation: The Public Utility Commission Role in Restructuring the Water Industry. Summary Report and Discussion Paper." (Washington: National Association of Water Companies. April 2004), p. 2-21. In the water utility industry, the term "viability" is sometimes used casually. In this paper we follow the definition from NRRI - with three components under the SDWA Amendments— technical, managerial. and financial. A 1992 NRRI report on water system viability suggested that financial viability addressed the three questions: (1) Does the system have or can it acquire capital? (2) Do the rates accurately. adequately. and equitably reflect the full cost of water service'? and (3) Are the system's customers willing and able to pay the necessary rates? "Evaluating Water Utility Capacity With Ratio Analysis and Discounted Cash Flows." p. 2. iY Southwest Water Company 2004 Annual Report. p. 4. 12 utilities report that their customers have been solicited by tort lawyers. This tort litigation issue is very significant in that, throughout the U.S., water utilities are being sued for providing unsafe water even though they are in compliance with relevant state and federal drinking water regulations. This obviously adds to the water utility's risks. Another major legal issue facing the investor-owned water utility industry pertains to if a water utility can retain the book value of the CIAC in the event the water utility sells its assets to a municipality in the context of an eminent domain proceeding. The NAWC has argued in a Maryland case° that utilities are entitled to be compensated for the acquisition by a governmental entity of property directly or indirectly funded through CLAC. Accounting Issues. In terms of utility accounting, most rate -regulated water utilities follow the National Association of Regulatory Utility Commissioner's (NARUC) Uniform System of Accounts. This System of Accounts prescribes very specific accounting rules which water utilities must follow. For valuation purposes, one of the most significant accounting issues pertains to the acquisition adjustment. Normally, the cost of an asset (e.g., utility plant and equipment) is recorded on the books of the first water utility to place the plant in service. However, in a case involving Indiana -American Water Company,41 the Indiana Utility Regulatory Commission allowed the new owner to earn a return based on the higher purchase price.42 In a more typical example, in an Arizona case involving the sale of Citizens Utilities water assets to Arizona -American Water Company, the price of the asset sale was $276.5 million (including a $71 million acquisition adjustment), 3 or about a 38% premium above book asset value. In this case, the Arizona Corporation Commission (ACC) said: ' fu/ure authorization of any acquisition adjustment recovery should be based 011 Arizona -American's ability to demonstrate that clear, quantifiable and substantial net benefits' have been realized by ratepayers in the affected areas, which would not have been realized had the transaction not occurred. "44 40 Beecher. Sourcebook o[Regulator. Techniquesfor fluter Utilities. January 1999 update. p. 1.5-1. 41 Cause No. 40103, May 30, 1996. 2 Mr. Fred E. Schlegal. presentation. "2"d International Conference — Valuing Your Water Utility." New Orleans, LA. January 14. 2002. 43 Arizona Corporation Commission. Decision No. 67093. p. 12. 4.1 Ibid.. p. 6. 13 Concerning the relationship between the market price and the value of the assets for ratemaking purposes, the ACC stated: "While the approximately S71 million over book cost price the Company freely chose to pay for the Citizens assets may represent the value of the acquisition to Arizona - American and its shareholders, it does not automatically follow that the price paid equates to the fair value of those assets for ratemaking purposes. -4' The Financial Accounting Standards Board (FASB) has set new rules that potentially affect the acquisition adjustment. Under FAS No. 142, "Goodwill and Other Intangible Assets," these assets must be tested for impairment annually, or more often, if certain circumstances indicate that impairment may exist. In the above Arizona case, the impairment could be as high as $71 million. Another major difference between water utilities and other non rate -regulated companies is that publicly traded investor-owned water utilities are allowed to deviate from generally accepted accounting principles (GAAP) under FASB No. 71 — "Accounting for the Effects of Certain Types of Regulation." FAS No. 71 requires cost -based, rate -regulated utilities to retlect the impact of regulatory decisions in their financial statements. Regulators can create regulatory assets that result when costs are allowed for ratemaking purposes in a period after the costs would be charged to expense by an unregulated enterprise. The necessary conditions for the applicability of FAS No. 71 include that the utility's rates are: 1 Approved by the regulator; 2. Designed to recover specific costs; and 3. Set to allow the utility to recover its costs (in view of its demand and competition). The major significance of FAS No. 71 is that if a regulatory commission shifts from a cost -based form of regulation to another form (e.g., incentive regulation), the utility's costs and ACC decision No. 67093, p. 15. 14 assets may not be recovered. Thus, if a utility has a form of incentive regulation in place, using the asset approach for valuation purposes becomes less useful. One example from the electric utility industry is a case where Pacific Gas and Electric Company (PG&E) was allowed a form of incentive ratemaking on its nuclear power plant, Diablo Canyon. In this case, the book value of Diablo Canyon was taken out of PG&E's rate base. Some other important FAS rules applicable to publicly traded investor-owned water utilities include: 109 (Accounting for Income Taxes); 101 (Accounting for the Discontinuation of Application No. 71); 144 (Accounting for the Impairment or Disposal of Long -Lived Assets); 90 (Regulated Enterprises — Accounting for Abandonments and Disallowances of Plant Costs); 92 (Regulated Enterprises - Accounting for Phase -In Plans); 13 (Accounting for Leases); 34 (Capitalization of Interest Cost); and 106 (Employers Accounting for Post-retirement Benefits Other Than Pensions). A PSC's accounting policies regarding depreciation and amortization will also affect a utility's profits, cash flow, and ultimately its value. Many experts believe that depreciation rates for water utilities have been too low historically - thus exacerbating the infrastructure rehabilitation challenges facing the industry. Because the water industry is capital intensive, deferred income taxes can be substantial. These taxes are created primarily by the difference between accelerated depression for income tax purposes and straight line depreciation for financial reporting and ratemaking purposes. Economic Issues. Valuation analysts frequently overlook a thorough analysis of economic issues. In the context of utility valuation studies, this oversight can result in serious errors. Many valuation reports discuss the overall macroeconomic conditions faced by a company. Valuation analysts should include both macroeconomic and microeconomic analyses of the company. The fundamental rationale for rate regulation is based on the theory that water utilities have characteristics of natural monopolies such as: 1. Providing an essential public service (and a commodity for which there are no substitutes); and 15 2. Providing more efficient service by one or two large companies where economics of scale exist (i.e., declining average costs as quantities increase). Unlike other industries, some water utilities engage in integrated resource planning (IRP) - also referred to as "least -cost planning." (This is considered an industry "best practice.") Twenty PSCs require water utilities to file various forms of plans including least -cost plans.`' In an IRP analysis, utility planners consider all possible demand-side (e.g., conservation) and supply-side resources (e.g., water from wells or purchased water)47 that will allow the utility to provide reliable service at reasonable prices. A key issue for valuation purposes is the difference between surplus capacity and excess capacity. All major utilities design their systems to provide a reserve margin during peak customer demand. However, commission regulators may determine that some of a utility's surplus capacity is "excess capacity" and not allow the utility an opportunity to earn a return on this investment. If this were to occur, a water utility's value would decline. Another valuation issue related to the utility's underlying economic condition relates to the potential for growth - particularly through the acquisition of adjacent or nearby water utilities. The likelihood of merging two or more adjacent water systems is often based on engineering -economics where the benefits of economies of scale related to the acquisition of water supplies are measured against the diseconomies of scale related to the transmission and distribution of the water. The water utility should also obtain an estimate of its customers' price elasticity of demand (i.e., the percentage change in consumption given a percentage change in price). Finally, regulated water utilities go through a process of cost allocation and rate design to establish rates for their customer classes (e.g., residential, commercial, industrial, etc.). In many cases, ultimate rates to customers are distorted by a variety of tactors. An analyst should David L. Hayward, 1 *rluing:1 11 inter [Vitt,. Chapter 3. p.16. -' In order fora water utility to obtain a Certificate of Public Convenience and Necessity (C'CN) it [nay be required by the regulators to show or prove that it has a reliable supply of water for a specified period. In Arizona. the period is 100 years_ 16 consider this in a valuation assignment in that a major rate redesign could have a significant impact on the utility's revenues, earnings, cash flow, and, ultimately, its total value. Thus, to complete a comprehensive valuation study, the analyst should know and incorporate the utility's • • long -run average and marginal costs; • demand and price elasticity by customer class; and • marginal revenues. short -run average and marginal costs; In most cases, a water utility's marginal costs are higher than its average costs. For example, in some cases a water utility's marginal cost of installing water mains is $100-$200 per linear foot (depending on location) as compared to its original cost of $2 per linear foot.48 Unfortunately, in many cases, the valuation analyst does not have any understanding about the utility's fundamental cost structure (including its average and marginal costs). -8 Commissioner Henry M. Duque. The Regulatory View of Valuation of Water Assets." Valuing Your Water Utility Conference, Embassy Suites Hotel. San Diego, CA, January 11. 2000. p. 17. 17 National Association of Certified Valuation To be comparable, the water utilities in Critique of Common Valuation Approaches Our experience in water utility valuation studies is that many people outside the industry believe valuing these companies is a simple task. It is not. They typically use words like "give us a preliminary valuation opinion." In some cases, they expect a valuation analyst to look up comparable sales in a book or data base. The Analysts (NACVA) has "rules of thumb" for many industries; however, they do not have anything for investor-owned water utilities." Often, this mindset results in no real analysis. For that reason, this section discusses the application of traditional valuation approaches in the context of the water utility industry. Market. Most valuation analysts give significant weight to the market approach and, in particular, "comparable transactions." The problems with using this approach for water utilities generally involve some combination of the following factors: timeliness of the data;50 number of companies in the analysis, size of the utilities; and location of assets or utilities. (This last fact is particularly important from a regulatory perspective). the sample should: 1. Be in the same primary business; 2. Have a similar capital structure; 3. Have a similar history of profitability; 4. Be similar in size (e.g., revenues, assets); and 5. Have similar growth rates (sales, customers, assets). 49 Stephen M. Zamucen. John Kinross -Kennedy. Daniel C. Curren. and Jamie Holmes, flow To I 'alue Over 100 Closely held Businesses, (Salt Lake Citv: The National Alliance of Consultants. Valuers and Analysts, 2002), Section III. '0 Mr. DeBenedictis. presentation. NAWC's 2004 Annual Conference. He stated that most premiums paid for water utilities have ended. (This remark was in the context of a wave of acquisitions of major investor-owned water utilities by European utilities in the late 1990s and the first part of the 21' century.) 18 To illustrate the market approach in the water utility industry, Table 2 shows data from the proposed condemnation of Tennessee -American Water Company by the City of Chattanooga, Tennessee. Table 2 Comparison of Investor -Owned Water Utility Transactions'` Rate Price Utility Date Base ($M) ($M) Multiple Ohio Suburban 1993 8.3 8.2 1.0 Missouri Cities 1993 25.3 15.7 .6 Indiana Cities 1993 49.3 37.3 .8 Clovis Water Co. 1986 12.2 13.8 1.1 In these cases, the benchmark for the acquisitions was rate base. The above data shows an 83% differential in the multiples. Clearly the size, location, and the date of transactions suggest that these are not comparable sales. Table 3 shows comparable transactions in terms of earnings before interest, income taxes, depreciation, and amortization or (EBITDA). ' David L. Hayward, "Rate Base (Asset) & Other Valuation Methodologies." Presentation, The Institute of Public Utilities, Michigan State University, April 26, 2005. 19 Table 3 Comparison of EBITDA Multiples Utility EBITDA Multinle Aquarion 9.80 United Water 15.80 Citizens Water Assets 19.30 SJW Corp. 11.90 E'Town 14.00 Average 14.16 EBITDA demonstrates advantages for analytical purposes in that it is not dependent on a utility management's decision such as depreciation, amortization, or financing. The disadvantages of EBITDA include: 1. To make the information meaningful, a comparable group is needed; and 2. This is primarily a historical analysis. Estimating next year's EBITDA for a comparable group may be difficult. Moreover, historical EBITDA multiples may be distorted by events such as the sale of land (common in the water utility industry). As with the case in the rate base multiples (Table 2), the above data reflects a wide range of EBITDA multiples. In this case, the range is 97%. Furthermore, EBITDA multiples do not provide any insight as to the amount of capital necessary to generate the EBITDA. So, for decision-making purposes, the above analysis is not very useful. Finally, another market measure is the so-called multiple of book equity.53 This approach is obviously useful for publicly traded water utilities. Again, an analyst must be careful using this method. For example, consider the acquisition of American Water Works Company (AWW) by 52 Hayward, Michigan State University presentation. 53 Another questionable valuation measure frequently cited by the press is "dollars per customer." 20 the German mega -utility — RWE AG. In this case, RWE paid over two times book equity for AWW and it has not yet generated any significant return on investment.'' AWW, however, was the largest investor-owned water utility in the U.S. with operations in 22 states. For the reasons described earlier, we do not believe this transaction would be a useful comparison in valuing an individual water utility, particularly a small water utility. Because of the ratemaking process, a rate -regulated, publicly -traded IOU would expect that, in the long run. its market -to -book ratio would equal one. As mentioned in the introduction to this article, to further emphasize the point about finding comparable sales, after burning through most of their budget in search of comparable transactions, and despite my recommendations to the contrary, our client finally concluded: "... if we don't get a (sic) expert valuation then we ure pretty much guessing as to whether this is a great, a goodd, a fair, or a not so good purchase as currently presented. "(Emphasis added.) In the same correspondence and recognizing the limitations of the market approach, the project manager recommended that the scope of our firm's involvement be expanded to include building a company cash flow and IX'EEE model. Asset. Asset-based approaches used in valuing water utilities include:" 1. Total net book value (total assets at original cost less accumulated depreciation); 2. Reproduction or replacement cost (less accumulated depreciation); 3. Rate base; 4. "Prudent investment" (i.e., property, plant, and equipment which the regulators believe are "prudently" incurred by the utility in order to provide service to the public) - also called "adjusted book value." 'a Melissa Stanford "A Report on the Second National Drinking Water Symposium." (Columbus. OH: The National Regulatory Research Institute. June 2004). p. 14. " Another method is an asset auction. In some cases. utilities have sold their assets (particularly electric utility generation plants) through an auction process. Some state commissions. however. prevent this form of piecemeal dismantling of a utility system for obvious reasons. 21 5. "Fair value." This approach defies any precise definition. Usually, a PSC will first determine a primary approach (e.g., original cost, reproduction cost) and then adjust its determination by various factors it deems appropriate in order to achieve a just and reasonable end result. For example, the ACC uses a mix of original cost and reproduction cost in deriving the value of a utility's property, plant and equipment as part of the rate base. 6. Economic value added (EVA). In a capital intensive industry, and in most cases utilities derive their earnings from their rate base, the asset approach seems a logical choice. However, in the water utility business, for some utilities, it is common that the plant in service is nearly fully depreciated (and hence requires the staggering amount of infrastructure investment referenced earlier). Frequently, small water utilities do not even have a current inventory and installation dates of their assets. In some cases, with potential liabilities (particularly environmental) added to a utility's assets, the net worth of the utility could be negative.56 In many cases, water utilities cannot raise capital at reasonable costs. yet they have a continuing obligation to provide service to the public. Some states have the authority to require other utilities to take over what are called "nonviable" utilities.57 In short, a major difference may exist between the utility's earnings (derived from its rate base) and the value it provides to its customers. And, the original cost of the plant and equipment may or may not be adjusted for its physical condition. Valuation analysts outside the water utility industry also recognize the limitations of the asset (or cost) approach. For example, The National Alliance of Consultants, Valuers and Analysts stated: "Valuations for rate -making purposes typically use some form of the cost approach or a prudent investment basis. The allowed rate of return may be linked 10 the experienced cost of senior capital. It is clear that this would not represent fair market value, which is concerned with current and future economic conditions... (Emphasis added.)" '(' Janice A. Beecher, Ph. D., 1, 7andity Policies and .-1 ssessnrent Alethods For Small Water [Utilities, p. 42. '' Beecher, Sourcehook afRegulatory Techniques for (tater Utilities_ Chapter 10.2. Zamucen. p. Section III. A second limitation of the asset approach relates to a category of assets called "deferred charges." These charges represent expenses paid by the utility in expectation of recovering the costs from ratepayers sometime in the future. Without a clear understanding of particular state case law and regulatory practices, a valuation analyst would not know: (a) if these assets are likely to be recovered, and (b) if the utility would earn a return on the balance during the interim period. In some utilities, this category has equaled up to 40% of total assets. As previously mentioned, the $71 million acquisition adjustment paid by Arizona -American is an example of a deferred charge. A third asset approach limitation relates to various other intangible assets with potentially huge value. yet not included in utility ratemaking. For example, if an investor-owned water utility held $1 billion in water rights, the value of these water rights would be reflected as zero for financial accounting and ratemaking purposes. In other industries, portfolio managers of $1 billion in assets would receive approximately $20 million in annual revenues (i.e., 2% of total assets) for managing the assets. (The significance of this issue can be illustrated by noting that 2004 profits of a large California-based investor-owned and publicly traded water utility - San Jose Water Company - were $14.7 million)." A fourth limitation of the book value approach is that a direct connection does not exist between the utility's after-tax weighted average cost of capital (WACC) and its return on invested capital (ROIC). In a non-regulated business environment, if a company consistently under -earned its required rate of return, the value of the company would decline. A fifth limitation of the asset approach (particularly the reproduction and reconstruction methods) is that these asset amounts neither necessarily correlate with the utility's earnings nor are always used for ratemaking purposes. Finally, as discussed previously, utilities often make investments described as "lumpy." This lumpy investment trend results from the utility periodically going through a construction phase. If plant and equipment are not immediately "used and useful" for the utility's ratepayers, portions of the investment may be excluded from that utility's rate base. In some cases, a utility SJW Corp.. 2004 Form 10-K, p. 52. 23 may make an investment and then wait a considerable period before the investment is included in its rate base. To remedy this problem, some regulators have allowed CWIP in rate base. A final asset approach is the economic value added (EVA) model (also called economic profit) developed in the 1800s by Alfred Marshall, an English economist. Essentially, in this model, a company's economic profit is measured by the difference between the WACC and the ROIC and then multiplied by the amount of invested capital. Credit Suisse First Boston, Goldman Sachs, and other firms in the investment community use the EVA model. Although not historically used for utilities, the model can provide important insights into a utility's value. Importantly, this model can identify year-to-year changes in a utility's value, allowing an analyst to isolate the reasons for the changes. Income. Two common income approaches used in valuing utilities are the capitalized earnings method and the discounted cash flow (DCF) method. In the capitalized earnings method, the "economic benefits" (e.g., net income) are divided by a capitalization rate. The general steps in the income approach are the same for utilities as well as other industries. These steps include: 1. Analyzing, and normalizing historical data if necessary; 2. Projecting the utility's future performance; 3. Estimating an appropriate discount or capitalization rate; 4. Estimating the utility's continuing value (CV); and 5. Calculating, analyzing, and interpreting the results. The first problem involves the measurement of "economic benefits." Of the common choices — (a) net income, (b) dividends, or (c) cash flow, we strongly recommend using cash flow. Our reasoning is that, for utilities, net income (profits) can be misleading because they may: 1. Include extraordinary items; 2. Use unrealistic depreciation rates; 3. lanore deferred income taxes; and 24 4. Include debt and equity allowances for funds used during construction (AFUDC). Our recommended income approach is the enterprise DCF model using free cash flows to the tirm (FCFF). This model is widely used in practice and includes earnings before interest and taxes (EBIT), plus depreciation and amortization expenses, plus deferred income taxes; minus capital expenditures, minus changes in working capital. The characteristics of this model are that it: 1. Provides a forward looking analysis of a company's operations; 2. Uses multiple time periods (eight years in our model — FinMod); 3. Adjusts accounting data to include only cash; and 4. Explicitly incorporates yearly investment. Advantages of the DCF model using FCFF are that it: 1. Is not dependent on the accountants' definition of earnings; 2. is useful. for closely held and small water utilities; 3. Has strong theoretical support; and 4. Incorporates the timing and amount of investment, deferred income taxes, and the appropriate WACC. �.;�/�= /6/71 c!i In contrast to the DCF model, some valuation analysts use a capitalized earnings approach which may yield misleading results. For example, in a valuation study of a small water system in Missoula County, Montana, a capitalization rate of between 9%-10% taken from Valle Line was applied to the utility's net operating income for a single year.i0 At least three major flaws exist with this analysis. First, a capitalization rate taken from Value Line (representing very large, investor-owned, publicly traded water utilities) usually does not accurately represent the risks of a small, isolated water utility with a different regulatory environment. Second, capitalizing net operating income can lead to inaccurate estimates of a utility's value. For reasons 60 Sue Hoell. "Valuation of a Privately Owned Water System and a Privately Operated Water System in Missoula. Montana." (Chicago: Assessment Journal. Nov./Dec. 1997), pp. 68-71. 25 mentioned earlier, cash flow is a better measure of economic benefits. Third, using a capitalization rate for a fast growing water utility can be unreasonable. Because of the substantial amount of tangible assets (and the timing of the investments), the DCF model is more appropriate for water utilities. FinMod: A Valuation Model For Water Utilities In 2000, HCG was asked to value the assets of Westpac Utilities using the DCF model. Noting the limitations with the market and asset approaches in the context of valuing water utilities, improvements were made such that in May 2005 FinMod became commercially available through NAWC. (The development of the model took approximately one year.) FinMod, Version 2.00.1, is an Excel spreadsheet which enables water utility participants (e.g., utilities, commercial bankers, other lenders providing low-cost loans, regulators, and other investors) to estimate a utility's value and future revenue requirements (for rate case purposes). Data for the model and valuation report originates from a client questionnaire.' Table 4 provides example of such. 61 Water Utility Valuation Client Questionnaire Copyright ©2005 Hayward Consulting Group. AU r. ights reserved. 26 Table 4 Summary Valuation Results (SM) Majestic Water Company Income Enterprise DCF $163.3 Capitalized Earnings Growth $99.4 Constant growth $196.3 Variable growth $433.5 Asset (Rate Base) Original Cost Less Depreciation Replacement Cost Less Depreciation Composite Less Depreciation Economic Profit Market (Transaction Based) $240.8 $483.0 $361.9 $233.7 Dollars per customer $188.4 Capital/EBITDA $141.7 Sales/EBITDA $155.3 Capital/EBIT $124,7 For valuation and regulatory purposes, the model provides key benefits in that it: 1. Analyzes the value of a utility using up to 12 valuation approaches; 2. Compares a utility's financial and operating performance to comparable utilities; 3. Identifies how the utility's expected performance compares to the National Regulatory Research Institute's (NRRI) "financial distress" benchmarks (useful for regulators in making policy decisions); 4. Captures the key regulatory policy issues in a state; 5. Identifies year-to-year changes in a utility's value (allowing the user to isolate the reasons for the changes); and 27 6. Creates reports which meet the requirements of suppliers of capital (e.g., bankers). Summary and Conclusion Valuing water utilities, a truly complex task today, requires a detailed computer model to capture all appropriate relevant variables. Intelligent water utility valuation discussion minus such a formal model is nearly impossible. Missing or overlooking any single issue (e.g., the amount of investment necessary to correct an arsenic problem) could be very costly for a potential purchaser. Finally, the List of due diligence issues is both long and complex. In the context of a water utility valuation assignment, one client finally concluded that there were: "...no reliable shortcuts..." and "...if we don't get an expert valuation then we are pretty much guessing [about the' purchase..." The industry is experiencing a consolidation phase primarily through acquisitions of smaller water utilities by larger utilities. In utility valuation projects with sophisticated buyers and sellers, insistence upon a DCF model as the primary valuation approach is usual. Investors or others with more limited budgets frequently (and sometimes in ways ultimately painful to their pocketbooks) realize that relevant data regarding comparable sales is very difficult to find and/or not useful. Similarly, using the asset approach solely may provide results which inaccurately reflect the utility's underlying value. Thus, market, asset, and capitalized earnings approaches may provide utility valuation estimates only slightly better than those created using a dart and a dartboard. In the area of accounting, companies which pay premiums above book value of a water utility's assets (i.e., a positive acquisition adjustment) may face significant uncertainties as to the future recovery of them. The recovery of various deferred assets (also called regulatory assets) is also uncertain for water utility owners. Utility regulators come and they go. Meanwhile, a utility waiting 20 years or longer to recover its assets may not then recover all of them. In particular, the water industry requires massive amounts of capital to address its infrastructure replacement, growth, and environmental requirements. 28 To recap, the water utility environment is very different from other non-regulated industries - particularly in the areas of regulation, accounting, legal issues, and economics. In this business: • Long -run planning is required; • Rates to customers often do not reflect the costs of providing service to them; • ROEs are historically low for small water utilities; and • In some cases, the PSCs' authorized rates of return on capital do not fully reflect the utility's risk. Because of some water utilities' sizes, clients requesting valuation studies can save substantial sums of money by engaging valuation analysts to prepare thorough reports. Even smaller water utilities with book assets in the $5 million range or less can experience significant gain or avoid potentially large losses through a limited, and possibly qualified, valuation report. A properly prepared and thoroughly researched valuation study can keep a client out of both the poorhouse and the courthouse. The major savings versus the cost of being wrong usually justifies both time and expense necessary to conduct such. David L. Hayward, president of Hayward Consulting Group (HCG) located in Encinitas, California has over 20 years experience in the utility industry. With a M.S. in Economics, Mr. Hayward is a Certified Rate of Return Analyst (CRRA) — a specialist in utility finance. Having written numerous utility valuation -related articles and books including. Valuing A Water Utility for the National Association of Water Companies (NAWC) and presented 13 workshops and seminars on utility valuation issues, he also has been involved in 13 utility valuation projects and teaches economics at the University of Phoenix. HCG's web site is. Thanks to Debbie Moyer, DJpi Editing, LLC, for her assistance in editing this article. 29 City of Eagle Local Improvement District (LID) Committee cc 3-/s--0 The Eagle City Council requested that Committee members, meeting for three two-hour sessions, form an opinion they would share with the Council on the City's extensive negotiation and due diligence process in evaluating the value and performance of acquiring and merging Eagle Water Company with the City's water system. The City trusts that, when the opportunities are discussed and the issues explored in more detail, the conclusions of the Council will be shared by these members of the community. The City is very grateful for the expertise represented by these voluntary members of the community and their time and effort to understand more fully the City's decision to purchase Eagle Water Company. Questions from the City: 1. From the information presented, do you believe the acquisition of Eagle Water Company — complete with customer base, infrastructure and water resources — is in the City's and public best interest? Yes. I feel that integrating the two systems alleviates the deficiencies of both systems giving the people within the LID the best possible water system plus the tremendous benefit of senior water rights. 2. Given the Committee's limited time to discuss available information and city's process, have you gained more confidence in the two-year effort of negotiation, evaluation and due diligence being performed by the City? Yes. feel it is unfortunate that due to legalities, the city was unable to bring this matter to the attention of the people earlier, but after 8 hours of focused discussions with Vern and the other members of this committee, I feel the City has advanced according to the structure of the law. 3. With the merger of the systems and the specific improvements outlined in the Purchase Agreement, can you see a basis for some allocation of performance benefits to all parties in a Local Improvement District? Yes. As previously stated both systems have deficiencies. A consideration of the cost for the city to improve its current system must be considered if this purchase does not take place. Merging the two systems, as I understand it, will make for a more viable, complete water system, better able to serve the residents within the LID boundaries. 4. From the discussion of improved water system reliability, sustainability, and potential beneficiaries, does the Local Improvement District boundary appear reasonable? Generally yes. It is obvious that United Water customers cannot be included. I also understand that areas outside the city boundaries cannot be included but I wonder if there is any way to address the properties on the east side of Hwy. 55 that are currently being serviced by the Eagle City Water who will definitely benefit from the improved water system. 5. Based on your limited assessment of the potential value of the system and value to the City, does the purchase price of $6.3 million in the Agreement appear to be reasonable? Yes. Looking at the Eagle Water Company as a whole including 6 existing wells, boosters, flow equalization reservoir, water mains and customer base is significant but only part of the purchase. The senior water rights, some dating back to the 1970's, which are included in this purchase are an important factor. All taken into consideration, it would appear that this a reasonable purchase price. Debra Helton 1203 Cerramar Ct Eagle, Id 83616 (208) 938-3416 October 24th 2007 March 18`h 2008 Rate Comparisons The following information was derived from my actual August 2007 bill from Eagle Water Company. The Eagle Water Company uses "cf' which stands for cubic foot or cubic feet. My total monthly usage for the month was 7,380cf. The United Water company uses "ccf' which stands for hundred cubic feet. For this comparison I will use ccf as my standard so my August usage was 73.8ccf (7,380cf : 100 = 73.8cf). The Eagle Water Company does not break it down on your water bill but has a base rate of $7.84 which allows for 0-6ccf which is considered domestic use. Usage over the 6ccf is billed at .451 per 1 ccf which would be the equivalent of irrigation use. EAGLE WATER COMPANY Domestic - 6ccf $7.84 Irrigation - 67.8ccf x $0.451 30.58 D.E.Q. Fee .33 Franchise Fee .38 Surcharge 13.00 Total $52.13 UNITED WATER COMPANY Domestic - 6ccf x $1.2112 $ 7.27 Irrigation - 67.8ccf x $1.5141 $102.66 Base Customer Charge 8.11 Eagle Franchise Fee 2.20 Safe Drinking Water Fee 0.25 Total $120.49 The Eagle Water Company bill of $52.13 is nice but unrealistic and soon to be a thing of the past with the inevitable sale of the company. So here's a condensed look at the rate comparisons; United Water Company $120.49 City of Eagle with the estimated high LID Assessment 109.66 Difference $ 10.83 Again, the sale is inevitable. So in looking at these basic figures, it will actually cost me Tess to have the City of Eagle purchase the Eagle Water Company, even with the LID assessment, than to have United Water make the purchase. And each of you that are Eagle Water Company customers can run these same figures with your bill and I'm sure you'll come up with similar savings. After the fact, I realized I have not addressed the citizens who are not Eagle Water Company customers. Most of them, due to their own wells or other irrigation situations will likely be in the low to middle assessment category, probably in the $5.00 410.00 a month range depending on the final assessment roll and means of assessment calculations. For some this is a couple of cups of Starbucks coffee For others on a fixed income it will be more of a burden. I don't take $10.00 lightly, but I do feel it is beneficial to all of us within the LID boundaries to have this integrated system. And when you return home tonight, turn on the national news and watch the fires in Southern California. Consider the natural habitat of that area and then look outside your windows at the foothills that surround us. The day might come when you'll want more than your well or a low flowing river to fight a fire and protect your home. Hopefully the day will never come when we see that kind of devastation but a little investment into securing of a more viable water system seems like the right thing to do. Debra Helton 1203 Cerramar Ct Eagle, Id 83616 (208) 938-3416 October 24th 2007 March 18t 2008 CITY OF EAGLE WATER Domestic - 6ccf x $1.19 $7.14 Irrigation - 67.8ccf x $1.19 80.68 Base Customer Charge 8.50 Total 96.32 The projected total assessment per residential unit or residential customer equivalent is $700.00 to $1900.00. If the owner elects to pay the LID in monthly installments over a 20 year period, the annual cost with an estimated 4% to 6% interest would be $60.00 to $160.00. Total Assessment Yearly Monthly $ 700.00 $ 60.00 $ 5.00 $1,900.00 $160.00 $13.34 CITY OF EAGLE WATER WITH LID ASSESSMENT Total as shown above $96.32 LID Assessment of $700.00 5.00 Total $101.32 Total as shown above $96.32 LID Assessment of $1900.00 13.34 Total $109.66 Appendices Presentation City of Eagle Public Meeting March 18, 2008 Appendix B.1 : City of Eagle Service Area Serviced Properties ) Domestic I ['Nation Fire Principal J Assmnt 15195 oll Ncl Parcel a c 303o0 938E STONYBRO OdK es I M' let l ERC) Asses1 sment J ERC ) Asses 0 000 Smart Ass ssmenl Assessment 00 • Reserve 1 2 R5241360171 1797N PRINCETON WAY 3/4" 1 0 5808 54 0 000 50 00 5195 99 51,004.53 51,104.98 3 R2082620260 1796N TRAILCREEK DR 3/4" 1 05808 54 0 000 50 00 $195 99 51,004.53 51,104.98 4 R1097040230 1550E DAYLESFORD DR 1" 1 0 5808 54 0 063 550 94 5195 99 51,055.47 $1,161.01 5 R5241380190 1700E HIGHGATE CT 3/4" 1 05808 54 0 000 50.00 519599 51,004.53 51,104.98 6 R5241260320 2002N PRESTWICK WAY 314" 1 0 5808 54 0.000 50 00 5195 99 51,004.53 51,104.98 7 R1096980090 1637N MOORLAND PL 1" 1 0 5808.54 0.063 S50 94 5195 99 51,055.47 51,161.01 8 R2082630040 1791N EAGLE CREEK WAY 314" 10 580854 0000 SO 00 519599 51,004.53 51,104.98 9 R5241440080 2287E ASHBROOK DR 314" 10 580854 0000 5000 $19599 51,004.53 51,104.98 10 82082620490 3006E DAGGER FALLS DR 3/4" 1 0580854 0000 50.00 519599 51,004.53 51,104.98 05 Appendix C.1: EWC Service Area 00 ServicedPro�rties IDomestic Irrigation ) Fire I Principal ( Assmnt Roll No Parcel No. Service Address [Meter ERCr1 Assessment a ERC' ( Assessmen Assessment Assessment + Reserve 93 71446770270 94 S Taylor 3/4" 1 0 6808 54 0.086 $69 5 $195 99 61,074.06 $1,181.47 94 R2500800050 172 S Academy 1" 1 78 $1,439 20 0.000 $0 00 $195 99 $1,635 19 $1,798.71 95 R2373370260 1440 E. Bogey 3/4" 1 0 $808 54 0.000 $0.00 $195 99 $1,004.53 $1,104.98 96 R2024500510 299 N 2nd St 3/4" 1 0 6808 54 0.032 $25.87 $195 99 $1,030.40 $1,133.44 97 R5782210120 859 E Knoll Ct. 3/4" 1.0 $808 54 0.083 $67.11 $195 99 $1,071.64 51,178.80 98 R1032150110 264 S Cobblestone Wy. 3/4" 1 0 $808.54 0 000 $0.00 $195.99 $1,004.53 $1,104.98 99 R5674040070 1243 E. Iron Eagle Dr. 1-1/2" 4.0 $3,234 16 0 000 $0.00 $195.99 $3,430.15 $3,773.17 100 R6875320070 335 S. Golden Eagle Ln 3/4" 1.0 $808 54 0 000 $0 00 $195 99 $1,004.53 $1,104.98 101 R0917730080 1128 N Falling Water 3/4" 1.0 $808 54 0 200 $161.71 $195.99 $1,166.24 $1,282.86 102 R2024500110 238 Mission 3/4" 1 0 $808 54 0 032 $25.87 $195.99 61,030.40 $1,133.44 6 :.. za2 80 Appendix C.2: EWC Service Area — Undeveloped Properties Undeveloped (\Properties Roll Not Parcel dAddress 'sion 1 1013 390 N Echohawk Way Xrbor Ridge 2 S0510438450 E Hill Rd Aguila 3 S0510427375 N Echohawk Way Arbor Ridge 4 90515325550 E Rnerside St Eagle Gateway So 5 S0515233920 1650E Rnerside 51 Eagle Gateway So 6 S0516142300 1650E Rnerside SI Eagle Gateway So 7 S0516142250 E Riserside SI Eagle Gateway So 8 S0516141911 E Rserside SI Lonesome Dole 9 50516141821 1505 E RAerside St Lonesome Dose 10 S0516131700 1205 E Rnerside St. Lonesome Dose 11 S0515223365 1601 E McGrath Rd Eagle Gateway No. 12 S0515223360 1601 E McGrath Rd. Eagle Gateway No 13 S0516212425 E Plaza Or East Plaza Disse 14 S0516244400 E Rserside Dr 7erraza 15 S0510427835 E Sadie Dr Arbor Ridge Domestic ' I aattion : I Fire Total Assessment ERC ) Assessment ERC Assessment 1 Assessment/ Assessment « Reserve 41 933.958 68 000 50.00 58,231 56 $42,190.1 546,409 29 24 619.404 96 0 000 50 00 S4,703 76 524,108.72 526,519 59 49 $39,618 46 0 000 50 00 59,603 51 549,221.97 554,144 17 88 571,151 52 0 000 50.00 517.247 12 988,398.64 597,238.50 249 520,132.65 0 000 50.00 54.88015 525,012.80 527,514.08 11 7 59.459 92 0 000 50.00 52,293 08 911,753 00 512,928 30 12 09,702 48 0.000 50 00 02.351 88 512.054.36 913,259.80 49 539,61846 0.000 8000 99,60351 $49,221.97 $54,14417 113 991,365 02 0 000 SO 00 922,146 87 5113,511 89 5124,863 08 44 535.575 76 0 000 50 00 58,623 56 944,199 32 548,619 25 7.2 95.821 49 0000 5000 91,411 13 57,23262 57,955.88 10 58.08540 0000 9000 51,959.90 510,045.30 511,049.83 49 539.618 46 0 000 90 00 59.603 51 949, 221.97 $54,144.17 66 053,363 64 0 000 SO 00 512.935.34 566,298 98 972,928,88 7 55,65978 0000 1000 51,371 93 57,031.71 57,734.88 Appendix D: Fire Flow I Roll No. Parcel No. Service Address Fire Assessment Principal Assessment Assessment + Reserve 1 R1918010160 1043 N DOWNING DR S195.99 $195.99 $215.59 2 R3073710070 951 E PLAZA DR $195.99 $195.99 $215.59 3 R454950085 180 N OLDE PARK PL $195.99 $195.99 $215.59 4 R454950072 154 N OLDE PARK PL $195.99 $195.99 $215.59 5 R7334270402 2195 E ELLIOTT ST $195.99 $195.99 $215.59 6 R7334270250 2056 E DUNYON ST $195.99 $195.99 $215.59 7 R257820025 2300 E SADIE DR $195.99 $195.99 $215.59 8 43073710050 952 E PLAZA DR $195.99 $195.99 $215.59 9 R7332920172 651 W RUSH CT $195.99 $195.99 $215.59 10 S0515417575 E STATE ST S195.99 $195.99 $215.59 Appendix F: Metered Irrigation 1 Subdivision Name IRock Pointe Condos ISepternber Sub Melvin's Eagle Pointe Sub Melvin's Eagle Pointe Sub Melvin's Eagle Pointe Sub Eagle Ranch Sub Eagle Ranch Sub rchohawk Estates Echohawk Estates Edgewcod Estates Edgewcod Estates Edgewcod Estates Ecgewcod Estates Edgewood Estates Service Address (right Bros. Common Area Eagle Knoll Comm 01 Eagle Pointe Comm 1 Eagle Pcinle Comm 2 Eagle Pointe Comm 3 ER Comm Area 1 ER Coram Area 2 Echohawk Comm 1 Echohawk Comm #2 Edgewood Comm #1 Edgewood Comm #2 Edgewood Cornm #3 Edgewood Cornm Edgewood Comm #5 ERC 1 Assessment / Meter ERC # of Lots Lot Lot 1-1."" 4.0 eat 0.04 536.08 2' 7.1 53 0.134 5107.44 r 1.78 1` 1.76 324 0.01e S12.83 1' 1.76 1-1/2" 4.0 1-1t2" 4.0 1' 1.75 7.11 1.75 2/4" 1.0 250 0.032 525.66 1C3 3.089 $71.36 2' 7.11 112 3.112 590.60 2/4" 1.0 1.78 Table 9: Additional Assessment Principles Parcel Number(s) Meter(s) Single Number Single Number Two or more metered services Two or more Single meter Numbers Single Number Explanation Single metered Duplex or more residences service Two or more metered services Single Number Single meter No Parcel Number One or more metered services Multiple commercial buildings with separate addresses Structure occupies multiple lots Large commercial building with multiple services Domestic ERC Assessment ERC per meter size assessed against parcel of record ERC per meter sizes added and assessed against parcel of record ERC assessed against dominant value parcel per Ada County records ERC per meter sizes added and assessed against parcel of record Condominium Units with single ERC meter HOA or Property Management of common areas. no structures per meter size divided by number of units ERC assessed uniformly against all lots or parcels in subdivision Fire Assessment One assessment per Parcel Number One assessment per Parcel Number One assessment against dominant value parcel per Ada County records One assessment per Parcel Number One assessment per Parcel Number None