Monterey Peninsula Water Supply Project A Evaluation of Capital Financing Alternatives For a 5.4 MGD Desalination Plant

Transcription

1 A Evaluation of Capital Financing Alternatives For a 5.4 MGD Desalination Plant Prepared by Monterey Peninsula Water Management District September 2012 (DRAFT Version 1.0)

2 Introduction California American Water Company ( Cal Am ) has filed an application for the Monterey Peninsula Water Supply Project, A In the application, four alternative project scenarios are examined: (i) 9.0 MGD plant with no Groundwater Replenishment ( GWR ) and no State Revolving Fund loans ( SRF ) (ii) 9.0 MGD plant with no GWR and using SRF (iii) 5.4 MGD plant with GWR and no SRF (iv) 5.4 MGD plant with GWR and using SRF In the two alternatives that include SRF loans, the proposed capital financing structure is as follows: 9.0 MGD plant w/o GWR w/ SRF 5.4 MGD plant w/ GWR w/ SRF Surcharge 2 (Pay as You Go) $99.1 million $99.1 million Long Term Debt $79.9 million $56.2 million Equity $90.4 million $63.6 million Both scenarios utilize $20 million of low cost commercial paper for additional funding in the early phases of construction, which is ultimately taken out by permanent long term funding. The purpose of this report is to: Identify mechanisms and approaches that can improve upon the proposed Cal Am financing plan to the benefit of ratepayers, without jeopardizing the project schedule. Two key measures are used to compare scenarios: (i) the total 40 year lifecycle cost, and (ii) the discounted net present value of future costs in 2012 dollars. Evaluation of Capital Financing Alternatives for a 5.4 MGD Desalination Plant Monterey Peninsula Water Supply Project (A ) DRAFT Ver 1.0 Page 1

3 Recommendations In the event the project is not publicly-owned, the District will offer to be the Public Partner for financial issues. This means that the District will make the following commitments and request that the CPUC final order direct Cal-Am to accept the District s decision regarding these financing alternatives at the time of the permanent project financing if doing so saves ratepayers money. This includes six basic considerations: 1) If available, State Revolving Fund (SRF) loans should be maximized and considered for up to 100% of the project funding to reduce costs to Peninsula ratepayers; 2) If SRF loans are not available for the entire project, then require Cal-Am to examine tax-exempt private activity debt as a funding source for both the debt component, but preferably additionally in lieu of equity. 3) Consider a public agency (i.e. MPWMD) contribution in lieu of Cal-Am debt or equity to reduce costs to Peninsula ratepayers. The contribution would be made via public debt and the source of repayment either a surcharge on the Cal-Am bill or direct fees and charges to property owners in the District established with a Proposition 218 process; 4) Even in the event of a Cal-Am borrowing, the District should offer and the CPUC should accept the District s potential public credit backstop to enhance the Cal-Am borrowing credit rating and reduce costs to Peninsula ratepayers. The District offers to substitute its public credit as a backstop to Cal-Am s creditworthiness in order to reduce the cost of Cal-Am s debt. It is anticipated that Cal-Am s parent obligation carries a credit rating of Baa2, but the District could raise that to perhaps A1. This might require the use of a stand-by water purchase agreement, a rate covenant, and other standing commitments; 5) In all cases, the CPUC should require at that point in the future when permanent financing is considered that the then-current market conditions be considered and, if warranted, the public participation in financing as outlined above be required. 6) If it turns out that State Revolving Funds require a public partner, as it normally would in most cases, the District offers to serve in that role; Evaluation of Capital Financing Alternatives for a 5.4 MGD Desalination Plant Monterey Peninsula Water Supply Project (A ) DRAFT Ver 1.0 Page 2

4 Calibration of District Model to Cal-Am Model Key Conclusions The District model was calibrated against the four Cal-Am scenarios and it was determined that the District model and the Cal-Am model produce sufficiently identical results to allow the District model to be used for analysis of alternative scenarios and assessment of variations to Cal-Am s assumptions. Making Cal-Am s Financing Plan Better If SRF loans are not available, then in today s market the use of Cal-Am tax-exempt debt instead of taxable corporate debt would reduce the cost to ratepayers. This advantage will improve in the future if the tax-exempt marketplace returns to a more traditional relationship to the taxable marketplace (see discussion below.) Hence, based on market conditions at the time, Cal-Am should consider the benefits of tax-exempt debt. Providing a public credit backstop to Cal-Am s credit rating would further reduce the cost to ratepayers, for either taxable or tax-exempt debt. The most significant savings to ratepayers occurs when debt is used in lieu of Cal-Am equity, either through a public contribution, Cal-Am debt (tax-exempt or corporate), or additional SRF loans. A comparison of results is included beginning page 7. The conclusions would remain the same if a 9.0 MGD plant were evaluated. Discussion: Debt to Equity Ratio The concept of financing the desalination project entirely with debt, SRF loans or tax-exempt public agency debt, clearly reduces the cost to the ratepayer. However, Cal-Am may be concerned about their debt to equity ratio statewide being impacted solely by the Monterey County District. We do not believe that this is a significant concern for three reasons: First, the debt to equity ratio is already undergoing a significant swing as a result of A , which signifies that shifts in the ratio due to exogenous factors are already familiar and acceptable to Cal-Am. The current debt to equity ratio is 58% - 42%, but A would change that to 47% - 53%, a large inversion. Second, Cal-Am intends to invest more than $400 million in infrastructure over the next five years (Testimony of Bente Villadsen in A ). According to Table A2 of the proposed decision in A Cal-Am s adopted rate base is$374.4 million. If it is assumed that existing rate base was financed as 58% - 42% debt to equity, the current authorized structure, and new investment will be 47% - 53%, then in the case of the 5.4 MGD plant where a full $119.8 million could be debt financed it would result in a 60% - 40% debt to equity ratio for Cal-Am overall, which is less than 5% different than the current debt to equity structure of Cal-Am. And third, when there is an equity portion coupled with SRF loans or outside contributions, an amount equal to the contributions is removed from the rate base resulting in 100% of the undepreciated rate Evaluation of Capital Financing Alternatives for a 5.4 MGD Desalination Plant Monterey Peninsula Water Supply Project (A ) DRAFT Ver 1.0 Page 3

5 base that remains earning an authorized equity rate of return, rather than a return based on the debt to equity ratio. The contribution repayment is done via a surcharge and the interest component is not adjusted for taxes in the revenue requirement calculation, as traditional debt would. It is unclear if the SRF loan or contribution can even be considered a debt or how the treatment is consistent with maintaining company-wide debt to equity ratios. There may also be ways to isolate the financing of the desalination plant from the rest of Cal-Am through accounting methods, special purpose corporation, or a financing subsidiary. Uncertainties in Cal-Am s Proposed Financing Plan By 2016 the market conditions for the permanent take-out financing will be different than today or even a year from now when the CPUC renders its decision. For example, the charts below underscore how the relationship between tax-exempt municipal debt and taxable corporate and US Treasury debt is much different today than traditionally, represented by the year If the tax-exempt marketplace returns to a more traditional relationship to the taxable marketplace, the advantages of public debt presented herein would increase significantly. Therefore, financing decisions should be made in the context of the then-prevailing market conditions Yield Curve Relationships 2007 Yield Curve Relationships Public Ownership v. Private Ownership A public owned project using traditional public financing that borrows all interest during construction (capitalized interest), even without the advantages of pay-as-you-go capital during the construction period such as a Surcharge 2, still competes favorably with Cal-Am s financing proposal. This scenario has not been included in this report. If pay-as-you-go monies can be provided to a public owned project, either through direct collections from constituents (ratepayers) through a Proposition 218 process, or the CPUC allows direct contributions from ratepayers through a Surcharge 2 mechanism, then the publicly-financed project is even more advantageous to ratepayers. Evaluation of Capital Financing Alternatives for a 5.4 MGD Desalination Plant Monterey Peninsula Water Supply Project (A ) DRAFT Ver 1.0 Page 4

6 Assumptions Cal-Am Debt: 47% debt ratio per A (Stephenson A.11, A.51) 5.00% interest rate for Cal-Am s model and initial testimony (Linam A.13) 6.63% interest rate for Cal-Am s authorized debt cost (Stephenson A.11, A.51) 4.70% interest rate if using tax-exempt debt backed by AWW Capital Corp 3.70% interest rate if using tax-exempt debt with public credit backstop Baa2 credit rating for American Water Works Capital Corp backed debt (per Moody s 8/15/12 Credit Opinion) Cal-Am s stand-alone credit rating would be below investment grade. On a stand-alone basis, several key metrics are below those expected for an investment grade rating from Moody s (Testimony of Bente Villadsen in A ) Cal-Am Equity: 53% equity ratio per A (Stephenson A.11, A.51) 9.99% equity rate of return (Stephenson A.11, A.51) State Revolving Funds: 2.50% interest rate (Linam A.13) 20 year term It should be noted that typically the SRF moneys are limited by the State to $50 million annually to a recipient. Recipients may receive funds in multiple years. This limitation may affect the ability to use SRF monies as proposed. Public Debt: 3.70% (Based on actual market data 8/16/12) 30 year term Effective Tax Rate: 40.75% (Linam A.12) 35% Federal tax rate (Linam A.12) 8.84% California tax rate (Linam A.12) Ad Valorem Tax Rate: Uncollectibles: 1.05% (Stephenson A.57; Linam A.12) % (Stephenson A.36; Linam A.12) Evaluation of Capital Financing Alternatives for a 5.4 MGD Desalination Plant Monterey Peninsula Water Supply Project (A ) DRAFT Ver 1.0 Page 5

7 Depreciation: 40 year plant life / 2.50% (Linam A.12) 25 year tax life / 4.00% (Linam A.12) AFUDC Rate: 1.00% thru 2015 (approximation based on Stephenson Attachment 5) 3.20% % in 2016 for 5.4 MGD (approximation based on Stephenson Attachment 5) O&M: Purchased Water: Excluded Only capital costs of 5.4 MGD plant evaluated Excluded Only capital costs of 5.4 MGD plant evaluated Surcharge 2: Year Amount 2013 $7,500, $27,040, $31,830, $32,780,000 Construction Draws: 9.0 MGD 5.4 MGD Year Amount Amount 2013 $13,110,000 $11,920, $32,940,000 $27,460, $61,470,000 $50,010, $152,480,000 $123,610,000 $260,000,000 $213,000,000 Costs of Issuance: Where public debt is assumed, additional costs of debt equal to 1.0% of borrowed amount Tax Treatment on Contributions: Contributions such as SRF loans or tax-exempt debt are treated as repaid through a surcharge, and that portion is removed from rate base and not subject to a return. This model does not subject the interest component to gross-up for taxes and does not treat the interest expense as a deductible expense item. The debt is included in the revenue requirement for analytical purposes, but in the case of a contribution repaid directly from public entity revenues, rather than a surcharge, it would not actually be part of the Cal-Am revenue requirement for ratemaking purposes. Rather, is included here to gather the overall cost to ratepayers. Evaluation of Capital Financing Alternatives for a 5.4 MGD Desalination Plant Monterey Peninsula Water Supply Project (A ) DRAFT Ver 1.0 Page 6

8 Summary of Financing Capital Costs Monterey Peninsula Water Supply Project 5.4 MGD Plant Size including Surcharge 2 Financing Scenario A B C D D-2 E Title Traditional Utility Financing Traditional Equity, SRF Loans in Lieu of Debt 100% SRF Loans in Lieu of Debt and Equity Traditional Equity, Cal-Am Tax- Exempt Debt (Baa2 Rating) Traditional Equity, Cal-Am Tax- Exempt Debt (Baa2 Rating) 100% Cal-Am Tax-Exempt Debt (Baa2 Rating) Debt Amount (see note 1) $56,587,000 $56,587,000 $120,397,000 $56,859,000 $56,859,000 $121,636,000 Debt Interest Rate 5.00% 2.50% 2.50% 4.70% 4.70% 4.70% How Debt Paid (see note 2) ROR Surcharge Surcharge Surcharge ROR Surcharge Debt Amortization Period (note 3) Depreciable Life 20 Year 20 Year 30 Year Depreciable Life 30 Year Equity Amount $63,810,000 $63,810,000 $0 $64,117,000 $64,117,000 $0 Post-Tax Equity Return 9.99% 9.99% N/A 9.99% 9.99% N/A Total 40-Yr Capital Cost Recovery $435,618,000 $387,426,000 $253,612,000 $423,184,000 $434,579,000 $328,472,000 Net Present Value of Capital Costs $245,057,000 $228,063,000 $165,316,000 $236,591,000 $244,473,000 $182,807,000 Notes: (1) Where tax exempt debt is assumed, issuance costs of 1% are added (2) Debt can be repaid either as part of the rate of return on undepreciated rate base ( ROR ) or through the pass-thru of a surcharge ( Surcharge ) (3) SRF loans are 20 year; Bonded debt is 30 year; In the rate of return is the tax-adjusted depreciable life (4) AFUDC is the same in all scenarios, a simplification which does not alter relative results; Not all AFUDC is recoverable when SRF loans and Public Contributions are used to finance. Page 7

9 Summary of Financing Capital Costs Monterey Peninsula Water Supply Project 5.4 MGD Plant Size including Surcharge 2 Financing Scenario E-2 F F-2 G G-2 H Title 100% Cal-Am Tax-Exempt Debt (Baa2 Rating) Traditional Equity, Cal-Am Tax- Exempt Debt w/ Public Backstop (A1 Rating) or Public Contribution Traditional Equity, Cal-Am Tax- Exempt Debt w/ Public Backstop (A1 Rating) 100% Cal-Am Tax- Exempt Debt w/ Public Backstop (A1 Rating) or Public Contribution 100%, Cal-Am Tax- Exempt Debt w/ Public Backstop (A1 Rating) Public Contribution in Lieu of Equity, SRF Loans in Lieu of Debt Debt Amount (see note 1) $121,636,000 $56,859,000 $56,859,000 $121,636,000 $121,636,000 $56,894,000 Debt Interest Rate 4.70% 3.70% 3.70% 3.70% 3.70% 2.50% How Debt Paid (see note 2) ROR Surcharge ROR Surcharge ROR Surcharge Debt Amortization Period (note 3) Depreciable Life 30 Year Depreciable Life 30 Year Depreciable Life 20 Year SRF 30 Year Contrib. Equity Amount $0 $64,117,000 $64,117,000 $0 $0 $64,157,000 Post-Tax Equity Return N/A 9.99% 9.99% N/A N/A 3.70% Debt Cost Total 40-Yr Capital Cost Recovery $311,433,000 $411,070,000 $425,512,000 $302,557,000 $292,032,000 $279,428,000 Net Present Value of Capital Costs $182,223,000 $231,484,000 $239,895,000 $171,882,000 $172,426,000 $168,779,000 Notes: (1) Where tax exempt debt is assumed, issuance costs of 1% are added (2) Debt can be repaid either as part of the rate of return on undepreciated rate base ( ROR ) or through the pass-thru of a surcharge ( Surcharge ) (3) SRF loans are 20 year; Bonded debt is 30 year; In the rate of return is the tax-adjusted depreciable life (4) AFUDC is the same in all scenarios, a simplification which does not alter relative results; Not all AFUDC is recoverable when SRF loans and Public Contributions are used to finance. Page 8

10 Scenario A: Traditional Financing / No SRF Financing / With Surcharge 2 Revenue Requirements Calculation Capital Costs $0 $11,920,000 $27,460,000 $50,010,000 $123,610,000 Surcharge #1 AFUDC Amount 0 59, , ,284 5,578,298 AFUDC Excluded from ROR 0 37, , ,888 1,479,303 Plant(Transfer to CWIP) 0 11,979,899 39,698,290 90,358, ,546, ,546,873 Accumulated AFUDC Excluded from ROR 0 37, , ,016 2,185,318 2,185,318 Accumulated Depreciation 2,955,289 Cumulative Surcharge 2 0 7,500,000 34,540,000 66,370,000 99,150,000 99,150,000 Cumulative Outside Contributions Cumulative Deferred Taxes 758,189 Rate Base & Return 0 4,465,656 4,915,414 23,431, ,959, ,730,196 Average Rate Base 0 2,232,828 4,690,535 14,173,397 71,195, ,344,650 Equity Return Necessary 6,213,047 Debt Return Necessary 2,757,599 Return Necessary, Gross-Up for Taxes 15,100,361 Interest Income Tax Savings, Gross-Up for Taxes -1,891,570 Total Return Required (Pre-Tax) 13,208,791 Expenses O&M Expense 0 Purchased Water Cost 0 Ad Valorem Taxes 0 23,445 49, , ,550 1,232,119 Depreciation & Amortization 2,955,289 Total Expense 4,187,408 Revenues from Expenses, Gross-Up for Uncollectibles 4,198,492 SRF Loan Repayment 0 Public Agency Contribution Repayment 0 Total Revenue Requirement (Lifecycle) $435,618, ,500,000 27,040,000 31,830,000 32,780,000 17,407,283 NPV of Revenue Requirement (2012 $) $245,057, ,142,857 24,526,077 27,495,951 26,968,187 13,639,062 Cost of Water ($/A-F) $1,934 Assumptions: Purchase Water Annual Cost $0 (per AF and escalation at 1/2 the O&M rate) Reduction After Yr 30 $0 (assumes $76,288,000 at 3.70% for 30 years) Purchased Water in AF 3,500 (GWR included or not) Annual O&M Expense (2017) $0 () O & M Cost Inflation Index 3.0% (combination of 2.0% and 3.23%) Annual Surcharge 2 Contribution $0 $7,500,000 $27,040,000 $31,830,000 $32,780,000 Outside Contribution for Debt? N Amount ---> $0 $0 $0 $0 $0 Contribution Principal Due $0 Contribution Interest Due $0 Contribution Length of Loan 20 years Contribution Interest Cost 2.50% (SRF at 2.5% per Linam testimony A.13; 3.70% for municipal debt) Outside Contribution for Equity? N Amount ---> $0 $0 $0 $0 $0 Contribution 2 Principal Due $0 Contribution 2 Interest Due $0 Contribution 2 Length of Loan 30 years Contribution 2 Interest Cost 3.70% (SRF at 2.5% per Linam testimony A.13; 3.70% for municipal debt) AFUDC Rate % (approximation based on Stephenson testimony, Attachement 5) AFUDC Rate thru % (approximation based on Stephenson testimony, Attachement 5) Equity Ratio 53% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Equity Rate of Return 9.99% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Debt Ratio 47% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Debt Interest Cost 5.00% (Linam testimony A.13; Future capital structure per A would be 6.63%) Effective Tax Rate % (Linam testimony A.12) Gross-Up Factor (based uncollectibles rate and state and federal tax rates as shown) Ad Valorem Tax Rate 1.050% (Stephenson testimony A.57; Linam testimony A.12) Gross-Up for Uncollectibles % ( % uncollectible revenues) Discount Rate for NPV 5.00% Total Acre-Feet Production 9,000 Depreciation Summary: Remaining Years of Book Depreciation 40 Composite Depreciation Rate 2.50% (based on 40 year life; Linam testimony A.12)) 2,955,289 Cumulative Book Depreciation 2,955,289 Remaining Years of Tax Depreciation 25 Tax Depreciation Rate 4.00% (based on 25 year tax life) 4,815,875 Cumulative Tax Depreciation 4,815,875 Excess of tax over book 1,860,586 Deferred Taxes 758,189 Page 9

11 Scenario A: Traditional Financing / No SRF Financing / With Surcharge 2 20,000,000 Ad Valorem Taxes 18,000,000 16,000,000 Purchased Water Cost O&M Expense Total Return Required (Pre Tax) Depreciation & Amortization SRF Loan Repayment Public Agency Contribution Repayment 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000, Page 10

12 Scenario B: Traditional Equity Portion with SRF Financing for Debt Portion / With Surcharge 2 Revenue Requirements Calculation Capital Costs $0 $11,920,000 $27,460,000 $50,010,000 $123,610,000 Surcharge #1 AFUDC Amount 0 59, , ,284 5,578,298 AFUDC Excluded from ROR 0 37, , ,888 4,032,952 Plant(Transfer to CWIP) 0 11,979,899 39,698,290 90,358, ,546, ,546,873 Accumulated AFUDC Excluded from ROR 0 37, , ,016 4,738,967 4,738,967 Accumulated Depreciation 1,476,784 Cumulative Surcharge 2 0 7,500,000 34,540,000 66,370,000 99,150,000 99,150,000 Cumulative Outside Contributions ,586,530 56,586,530 Cumulative Deferred Taxes 438,319 Rate Base & Return 0 4,465,656 4,915,414 23,431,380 59,506,801 57,771,986 Average Rate Base 0 2,232,828 4,690,535 14,173,397 41,469,090 58,639,393 Equity Return Necessary 5,858,075 Debt Return Necessary 0 Return Necessary, Gross-Up for Taxes 9,860,945 Interest Income Tax Savings, Gross-Up for Taxes 0 Total Return Required (Pre-Tax) 9,860,945 Expenses O&M Expense 0 Purchased Water Cost 0 Ad Valorem Taxes 0 23,445 49, , , ,714 Depreciation & Amortization 1,476,784 Total Expense 2,092,498 Revenues from Expenses, Gross-Up for Uncollectibles 2,098,037 SRF Loan Repayment 3,629,863 Public Agency Contribution Repayment 0 Total Revenue Requirement (Lifecycle) $387,425, ,500,000 27,040,000 31,830,000 32,780,000 15,588,846 NPV of Revenue Requirement (2012 $) $228,062, ,142,857 24,526,077 27,495,951 26,968,187 12,214,268 Cost of Water ($/A-F) $1,732 Assumptions: Purchase Water Annual Cost $0 (per AF and escalation at 1/2 the O&M rate) Reduction After Yr 30 $0 (assumes $76,288,000 at 3.70% for 30 years) Purchased Water in AF 3,500 (GWR included or not) Annual O&M Expense (2017) $0 () O & M Cost Inflation Index 3.0% (combination of 2.0% and 3.23%) Annual Surcharge 2 Contribution $0 $7,500,000 $27,040,000 $31,830,000 $32,780,000 Outside Contribution for Debt? Y Amount ---> $0 $0 $0 $0 $56,586,530 Contribution Principal Due $2,215,200 Contribution Interest Due $1,414,663 Contribution Length of Loan 20 years Contribution Interest Cost 2.50% (SRF at 2.5% per Linam testimony A.13; 3.70% for municipal debt) Outside Contribution for Equity? N Amount ---> $0 $0 $0 $0 $0 Contribution 2 Principal Due $0 Contribution 2 Interest Due $0 Contribution 2 Length of Loan 30 years Contribution 2 Interest Cost 3.70% (SRF at 2.5% per Linam testimony A.13; 3.70% for municipal debt) AFUDC Rate % (approximation based on Stephenson testimony, Attachement 5) AFUDC Rate thru % (approximation based on Stephenson testimony, Attachement 5) Equity Ratio 53% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Equity Rate of Return 9.99% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Debt Ratio 47% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Debt Interest Cost 5.00% (Linam testimony A.13; Future capital structure per A would be 6.63%) Effective Tax Rate % (Linam testimony A.12) Gross-Up Factor (based uncollectibles rate and state and federal tax rates as shown) Ad Valorem Tax Rate 1.050% (Stephenson testimony A.57; Linam testimony A.12) Gross-Up for Uncollectibles % ( % uncollectible revenues) Discount Rate for NPV 5.00% Total Acre-Feet Production 9,000 Depreciation Summary: Remaining Years of Book Depreciation 40 Composite Depreciation Rate 2.50% (based on 40 year life; Linam testimony A.12)) 1,476,784 Cumulative Book Depreciation 1,476,784 Remaining Years of Tax Depreciation 25 Tax Depreciation Rate 4.00% (based on 25 year tax life) 2,552,414 Cumulative Tax Depreciation 2,552,414 Excess of tax over book 1,075,629 Deferred Taxes 438,319 Page 11

13 Scenario B: Traditional Equity Portion with SRF Financing for Debt Portion / With Surcharge 2 20,000,000 Ad Valorem Taxes 18,000,000 16,000,000 Purchased Water Cost O&M Expense Total Return Required (Pre Tax) Depreciation & Amortization SRF Loan Repayment Public Agency Contribution Repayment 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000, Page 12

14 Scenario C: 100% with SRF Financing / With Surcharge 2 Revenue Requirements Calculation Capital Costs $0 $11,920,000 $27,460,000 $50,010,000 $123,610,000 Surcharge #1 AFUDC Amount 0 59, , ,284 5,578,298 AFUDC Excluded from ROR 0 37, , ,888 6,912,598 Plant(Transfer to CWIP) 0 11,979,899 39,698,290 90,358, ,546, ,546,873 Accumulated AFUDC Excluded from ROR 0 37, , ,016 7,618,614 7,618,614 Accumulated Depreciation 0 Cumulative Surcharge 2 0 7,500,000 34,540,000 66,370,000 99,150,000 99,150,000 Cumulative Outside Contributions ,396, ,396,873 Cumulative Deferred Taxes 0 Rate Base & Return 0 4,465,656 4,915,414 23,431, Average Rate Base 0 2,232,828 4,690,535 14,173,397 11,715,690 0 Equity Return Necessary 0 Debt Return Necessary 0 Return Necessary, Gross-Up for Taxes 0 Interest Income Tax Savings, Gross-Up for Taxes 0 Total Return Required (Pre-Tax) 0 Expenses O&M Expense 0 Purchased Water Cost 0 Ad Valorem Taxes 0 23,445 49, , ,015 0 Depreciation & Amortization 0 Total Expense 0 Revenues from Expenses, Gross-Up for Uncollectibles 0 SRF Loan Repayment 7,723,114 Public Agency Contribution Repayment 0 Total Revenue Requirement (Lifecycle) $253,612, ,500,000 27,040,000 31,830,000 32,780,000 7,723,114 NPV of Revenue Requirement (2012 $) $165,315, ,142,857 24,526,077 27,495,951 26,968,187 6,051,262 Cost of Water ($/A-F) $858 Assumptions: Purchase Water Annual Cost $0 (per AF and escalation at 1/2 the O&M rate) Reduction After Yr 30 $0 (assumes $76,288,000 at 3.70% for 30 years) Purchased Water in AF 3,500 (GWR included or not) Annual O&M Expense (2017) $0 () O & M Cost Inflation Index 3.0% (combination of 2.0% and 3.23%) Annual Surcharge 2 Contribution $0 $7,500,000 $27,040,000 $31,830,000 $32,780,000 Outside Contribution for Debt? Y Amount ---> $0 $0 $0 $0 $120,396,873 Contribution Principal Due $4,713,192 Contribution Interest Due $3,009,922 Contribution Length of Loan 20 years Contribution Interest Cost 2.50% (SRF at 2.5% per Linam testimony A.13; 3.70% for municipal debt) Outside Contribution for Equity? N Amount ---> $0 $0 $0 $0 $0 Contribution 2 Principal Due $0 Contribution 2 Interest Due $0 Contribution 2 Length of Loan 30 years Contribution 2 Interest Cost 3.70% (SRF at 2.5% per Linam testimony A.13; 3.70% for municipal debt) AFUDC Rate % (approximation based on Stephenson testimony, Attachement 5) AFUDC Rate thru % (approximation based on Stephenson testimony, Attachement 5) Equity Ratio 0% (Assumes no equity) Equity Rate of Return 9.99% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Debt Ratio 100% (Assumes 100% SRF Loans for debt component) Debt Interest Cost 5.00% (Linam testimony A.13; Future capital structure per A would be 6.63%) Effective Tax Rate % (Linam testimony A.12) Gross-Up Factor (based uncollectibles rate and state and federal tax rates as shown) Ad Valorem Tax Rate 1.050% (Stephenson testimony A.57; Linam testimony A.12) Gross-Up for Uncollectibles % ( % uncollectible revenues) Discount Rate for NPV 5.00% Total Acre-Feet Production 9,000 Depreciation Summary: Remaining Years of Book Depreciation 40 Composite Depreciation Rate 2.50% (based on 40 year life; Linam testimony A.12)) 0 Cumulative Book Depreciation 0 Remaining Years of Tax Depreciation 25 Tax Depreciation Rate 4.00% (based on 25 year tax life) 0 Cumulative Tax Depreciation 0 Excess of tax over book 0 Deferred Taxes 0 Page 13

15 Scenario C: 100% with SRF Financing / With Surcharge 2 20,000,000 Ad Valorem Taxes 18,000,000 16,000,000 Purchased Water Cost O&M Expense Total Return Required (Pre Tax) Depreciation & Amortization SRF Loan Repayment Public Agency Contribution Repayment 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000, Page 14

16 Scenario D: Traditional Equity Portion with Cal-Am Tax-Exempt Financing for Debt Portion (Repaid thru Surcharge) / With Surcharge 2 Revenue Requirements Calculation Capital Costs $0 $11,920,000 $27,460,000 $50,010,000 $124,178,587 Surcharge #1 AFUDC Amount 0 59, , ,284 5,588,720 AFUDC Excluded from ROR 0 37, , ,888 4,034,234 Plant(Transfer to CWIP) 0 11,979,899 39,698,290 90,358, ,125, ,125,882 Accumulated AFUDC Excluded from ROR 0 37, , ,016 4,740,249 4,740,249 Accumulated Depreciation 1,484,424 Cumulative Surcharge 2 0 7,500,000 34,540,000 66,370,000 99,150,000 99,150,000 Cumulative Outside Contributions ,858,664 56,858,664 Cumulative Deferred Taxes 440,208 Rate Base & Return 0 4,465,656 4,915,414 23,431,380 59,814,006 58,071,234 Average Rate Base 0 2,232,828 4,690,535 14,173,397 41,622,693 58,942,620 Equity Return Necessary 5,888,368 Debt Return Necessary 0 Return Necessary, Gross-Up for Taxes 9,911,937 Interest Income Tax Savings, Gross-Up for Taxes 0 Total Return Required (Pre-Tax) 9,911,937 Expenses O&M Expense 0 Purchased Water Cost 0 Ad Valorem Taxes 0 23,445 49, , , ,898 Depreciation & Amortization 1,484,424 Total Expense 2,103,322 Revenues from Expenses, Gross-Up for Uncollectibles 2,108,889 SRF Loan Repayment 3,573,222 Public Agency Contribution Repayment 0 Total Revenue Requirement (Lifecycle) $423,183, ,500,000 27,040,000 31,830,000 32,780,000 15,594,048 NPV of Revenue Requirement (2012 $) $236,590, ,142,857 24,526,077 27,495,951 26,968,187 12,218,344 Cost of Water ($/A-F) $1,733 Assumptions: Purchase Water Annual Cost $0 (per AF and escalation at 1/2 the O&M rate) Reduction After Yr 30 $0 (assumes $76,288,000 at 3.70% for 30 years) Purchased Water in AF 3,500 (GWR included or not) Annual O&M Expense (2017) $0 () O & M Cost Inflation Index 3.0% (combination of 2.0% and 3.23%) Annual Surcharge 2 Contribution $0 $7,500,000 $27,040,000 $31,830,000 $32,780,000 Outside Contribution for Debt? Y Amount ---> $0 $0 $0 $0 $56,858,664 Contribution Principal Due $900,865 Contribution Interest Due $2,672,357 Contribution Length of Loan 30 years Contribution Interest Cost 4.70% (AWW tax-exempt debt rate assumed 4.7%) Outside Contribution for Equity? N Amount ---> $0 $0 $0 $0 $0 Contribution 2 Principal Due $0 Contribution 2 Interest Due $0 Contribution 2 Length of Loan 30 years Contribution 2 Interest Cost 3.70% (SRF at 2.5% per Linam testimony A.13; 3.70% for municipal debt) AFUDC Rate % (approximation based on Stephenson testimony, Attachement 5) AFUDC Rate thru % (approximation based on Stephenson testimony, Attachement 5) Equity Ratio 53% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Equity Rate of Return 9.99% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Debt Ratio 47% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Debt Interest Cost 5.00% (Linam testimony A.13; Future capital structure per A would be 6.63%) Effective Tax Rate % (Linam testimony A.12) Gross-Up Factor (based uncollectibles rate and state and federal tax rates as shown) Ad Valorem Tax Rate 1.050% (Stephenson testimony A.57; Linam testimony A.12) Gross-Up for Uncollectibles % ( % uncollectible revenues) Discount Rate for NPV 5.00% Total Acre-Feet Production 9,000 Depreciation Summary: Remaining Years of Book Depreciation 40 Composite Depreciation Rate 2.50% (based on 40 year life; Linam testimony A.12)) 1,484,424 Cumulative Book Depreciation 1,484,424 Remaining Years of Tax Depreciation 25 Tax Depreciation Rate 4.00% (based on 25 year tax life) 2,564,689 Cumulative Tax Depreciation 2,564,689 Excess of tax over book 1,080,264 Deferred Taxes 440,208 Page 15

17 Scenario D: Traditional Equity Portion with Cal-Am Tax-Exempt Financing for Debt Portion (Repaid thru Surcharge) / With Surcharge 2 20,000,000 Ad Valorem Taxes 18,000,000 16,000,000 Purchased Water Cost O&M Expense Total Return Required (Pre Tax) Depreciation & Amortization SRF Loan Repayment Public Agency Contribution Repayment 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000, Page 16

18 Scenario D-2: Traditional Equity Portion with Cal-Am Tax-Exempt Financing for Debt Portion / With Surcharge 2 Revenue Requirements Calculation Capital Costs $0 $11,920,000 $27,460,000 $50,010,000 $124,178,587 Surcharge #1 AFUDC Amount 0 59, , ,284 5,588,720 AFUDC Excluded from ROR 0 37, , ,888 1,475,281 Plant(Transfer to CWIP) 0 11,979,899 39,698,290 90,358, ,125, ,125,882 Accumulated AFUDC Excluded from ROR 0 37, , ,016 2,181,296 2,181,296 Accumulated Depreciation 2,969,865 Cumulative Surcharge 2 0 7,500,000 34,540,000 66,370,000 99,150,000 99,150,000 Cumulative Outside Contributions Cumulative Deferred Taxes 761,687 Rate Base & Return 0 4,465,656 4,915,414 23,431, ,545, ,301,228 Average Rate Base 0 2,232,828 4,690,535 14,173,397 71,488, ,923,221 Equity Return Necessary 6,243,681 Debt Return Necessary 2,604,924 Return Necessary, Gross-Up for Taxes 14,894,927 Interest Income Tax Savings, Gross-Up for Taxes -1,786,842 Total Return Required (Pre-Tax) 13,108,085 Expenses O&M Expense 0 Purchased Water Cost 0 Ad Valorem Taxes 0 23,445 49, , ,627 1,238,194 Depreciation & Amortization 2,969,865 Total Expense 4,208,058 Revenues from Expenses, Gross-Up for Uncollectibles 4,219,197 SRF Loan Repayment 0 Public Agency Contribution Repayment 0 Total Revenue Requirement (Lifecycle) $434,579, ,500,000 27,040,000 31,830,000 32,780,000 17,327,282 NPV of Revenue Requirement (2012 $) $244,473, ,142,857 24,526,077 27,495,951 26,968,187 13,576,379 Cost of Water ($/A-F) $1,925 Assumptions: Purchase Water Annual Cost $0 (per AF and escalation at 1/2 the O&M rate) Reduction After Yr 30 $0 (assumes $76,288,000 at 3.70% for 30 years) Purchased Water in AF 3,500 (GWR included or not) Annual O&M Expense (2017) $0 () O & M Cost Inflation Index 3.0% (combination of 2.0% and 3.23%) Annual Surcharge 2 Contribution $0 $7,500,000 $27,040,000 $31,830,000 $32,780,000 Outside Contribution for Debt? N Amount ---> $0 $0 $0 $0 $0 Contribution Principal Due $0 Contribution Interest Due $0 Contribution Length of Loan 20 years Contribution Interest Cost 2.50% (SRF at 2.5% per Linam testimony A.13; 3.70% for municipal debt) Outside Contribution for Equity? N Amount ---> $0 $0 $0 $0 $0 Contribution 2 Principal Due $0 Contribution 2 Interest Due $0 Contribution 2 Length of Loan 30 years Contribution 2 Interest Cost 3.70% (SRF at 2.5% per Linam testimony A.13; 3.70% for municipal debt) AFUDC Rate % (approximation based on Stephenson testimony, Attachement 5) AFUDC Rate thru % (approximation based on Stephenson testimony, Attachement 5) Equity Ratio 53% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Equity Rate of Return 9.99% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Debt Ratio 47% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Debt Interest Cost 4.70% (AWW Capital Corp Baa2 credit rating) Effective Tax Rate % (Linam testimony A.12) Gross-Up Factor (based uncollectibles rate and state and federal tax rates as shown) Ad Valorem Tax Rate 1.050% (Stephenson testimony A.57; Linam testimony A.12) Gross-Up for Uncollectibles % ( % uncollectible revenues) Discount Rate for NPV 5.00% Total Acre-Feet Production 9,000 Depreciation Summary: Remaining Years of Book Depreciation 40 Composite Depreciation Rate 2.50% (based on 40 year life; Linam testimony A.12)) 2,969,865 Cumulative Book Depreciation 2,969,865 Remaining Years of Tax Depreciation 25 Tax Depreciation Rate 4.00% (based on 25 year tax life) 4,839,035 Cumulative Tax Depreciation 4,839,035 Excess of tax over book 1,869,171 Deferred Taxes 761,687 Page 17

19 Scenario D-2: Traditional Equity Portion with Cal-Am Tax-Exempt Financing for Debt Portion / With Surcharge 2 20,000,000 Ad Valorem Taxes 18,000,000 16,000,000 Purchased Water Cost O&M Expense Total Return Required (Pre Tax) Depreciation & Amortization SRF Loan Repayment Public Agency Contribution Repayment 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000, Page 18

20 Scenario E: 100% with Cal-Am Tax-Exempt Debt Financing (repaid thru Surcharge) Revenue Requirements Calculation Capital Costs $0 $11,920,000 $27,460,000 $50,010,000 $124,826,355 Surcharge #1 AFUDC Amount 0 59, , ,284 5,600,594 AFUDC Excluded from ROR 0 37, , ,888 6,928,173 Plant(Transfer to CWIP) 0 11,979,899 39,698,290 90,358, ,785, ,785,524 Accumulated AFUDC Excluded from ROR 0 37, , ,016 7,634,189 7,634,189 Accumulated Depreciation 0 Cumulative Surcharge 2 0 7,500,000 34,540,000 66,370,000 99,150,000 99,150,000 Cumulative Outside Contributions ,635, ,635,524 Cumulative Deferred Taxes 0 Rate Base & Return 0 4,465,656 4,915,414 23,431, Average Rate Base 0 2,232,828 4,690,535 14,173,397 11,715,690 0 Equity Return Necessary 0 Debt Return Necessary 0 Return Necessary, Gross-Up for Taxes 0 Interest Income Tax Savings, Gross-Up for Taxes 0 Total Return Required (Pre-Tax) 0 Expenses O&M Expense 0 Purchased Water Cost 0 Ad Valorem Taxes 0 23,445 49, , ,015 0 Depreciation & Amortization 0 Total Expense 0 Revenues from Expenses, Gross-Up for Uncollectibles 0 SRF Loan Repayment 7,644,054 Public Agency Contribution Repayment 0 Total Revenue Requirement (Lifecycle) $328,471, ,500,000 27,040,000 31,830,000 32,780,000 7,644,054 NPV of Revenue Requirement (2012 $) $182,807, ,142,857 24,526,077 27,495,951 26,968,187 5,989,316 Cost of Water ($/A-F) $849 Assumptions: Purchase Water Annual Cost $0 (per AF and escalation at 1/2 the O&M rate) Reduction After Yr 30 $0 (assumes $76,288,000 at 3.70% for 30 years) Purchased Water in AF 3,500 (GWR included or not) Annual O&M Expense (2017) $0 () O & M Cost Inflation Index 3.0% (combination of 2.0% and 3.23%) Annual Surcharge 2 Contribution $0 $7,500,000 $27,040,000 $31,830,000 $32,780,000 Outside Contribution for Debt? Y Amount ---> $0 $0 $0 $0 $121,635,524 Contribution Principal Due $1,927,185 Contribution Interest Due $5,716,870 Contribution Length of Loan 30 years Contribution Interest Cost 4.70% (AWW tax-exempt debt rate assumed 4.7%) Outside Contribution for Equity? N Amount ---> $0 $0 $0 $0 $0 Contribution 2 Principal Due $0 Contribution 2 Interest Due $0 Contribution 2 Length of Loan 30 years Contribution 2 Interest Cost 3.70% (SRF at 2.5% per Linam testimony A.13; 3.70% for municipal debt) AFUDC Rate % (approximation based on Stephenson testimony, Attachement 5) AFUDC Rate thru % (approximation based on Stephenson testimony, Attachement 5) Equity Ratio 0% (assume 100% debt financed) Equity Rate of Return 9.99% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Debt Ratio 100% (assume 100% debt financed) Debt Interest Cost 5.00% (Linam testimony A.13; Future capital structure per A would be 6.63%) Effective Tax Rate % (Linam testimony A.12) Gross-Up Factor (based uncollectibles rate and state and federal tax rates as shown) Ad Valorem Tax Rate 1.050% (Stephenson testimony A.57; Linam testimony A.12) Gross-Up for Uncollectibles % ( % uncollectible revenues) Discount Rate for NPV 5.00% Total Acre-Feet Production 9,000 Depreciation Summary: Remaining Years of Book Depreciation 40 Composite Depreciation Rate 2.50% (based on 40 year life; Linam testimony A.12)) 0 Cumulative Book Depreciation 0 Remaining Years of Tax Depreciation 25 Tax Depreciation Rate 4.00% (based on 25 year tax life) 0 Cumulative Tax Depreciation 0 Excess of tax over book 0 Deferred Taxes 0 Page 19

21 Scenario E: 100% with Cal-Am Tax-Exempt Debt Financing (repaid thru Surcharge) 20,000,000 Ad Valorem Taxes 18,000,000 16,000,000 Purchased Water Cost O&M Expense Total Return Required (Pre Tax) Depreciation & Amortization SRF Loan Repayment Public Agency Contribution Repayment 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000, Page 20

22 Scenario E-2: 100% with Cal-Am Tax-Exempt Debt Financing / With Surcharge 2 Revenue Requirements Calculation Capital Costs $0 $11,920,000 $27,460,000 $50,010,000 $124,826,355 Surcharge #1 AFUDC Amount 0 59, , ,284 5,600,594 AFUDC Excluded from ROR 0 37, , ,888 1,470,743 Plant(Transfer to CWIP) 0 11,979,899 39,698,290 90,358, ,785, ,785,524 Accumulated AFUDC Excluded from ROR 0 37, , ,016 2,176,758 2,176,758 Accumulated Depreciation 2,986,469 Cumulative Surcharge 2 0 7,500,000 34,540,000 66,370,000 99,150,000 99,150,000 Cumulative Outside Contributions Cumulative Deferred Taxes 765,673 Rate Base & Return 0 4,465,656 4,915,414 23,431, ,212, ,951,738 Average Rate Base 0 2,232,828 4,690,535 14,173,397 71,822, ,582,318 Equity Return Necessary 0 Debt Return Necessary 5,573,369 Return Necessary, Gross-Up for Taxes 9,381,697 Interest Income Tax Savings, Gross-Up for Taxes -3,823,041 Total Return Required (Pre-Tax) 5,558,655 Expenses O&M Expense 0 Purchased Water Cost 0 Ad Valorem Taxes 0 23,445 49, , ,132 1,245,114 Depreciation & Amortization 2,986,469 Total Expense 4,231,583 Revenues from Expenses, Gross-Up for Uncollectibles 4,242,784 SRF Loan Repayment 0 Public Agency Contribution Repayment 0 Total Revenue Requirement (Lifecycle) $311,433, ,500,000 27,040,000 31,830,000 32,780,000 9,801,440 NPV of Revenue Requirement (2012 $) $182,222, ,142,857 24,526,077 27,495,951 26,968,187 7,679,684 Cost of Water ($/A-F) $1,089 Assumptions: Purchase Water Annual Cost $0 (per AF and escalation at 1/2 the O&M rate) Reduction After Yr 30 $0 (assumes $76,288,000 at 3.70% for 30 years) Purchased Water in AF 3,500 (GWR included or not) Annual O&M Expense (2017) $0 () O & M Cost Inflation Index 3.0% (combination of 2.0% and 3.23%) Annual Surcharge 2 Contribution $0 $7,500,000 $27,040,000 $31,830,000 $32,780,000 Outside Contribution for Debt? N Amount ---> $0 $0 $0 $0 $0 Contribution Principal Due $0 Contribution Interest Due $0 Contribution Length of Loan 20 years Contribution Interest Cost 2.50% (SRF at 2.5% per Linam testimony A.13; 3.70% for municipal debt) Outside Contribution for Equity? N Amount ---> $0 $0 $0 $0 $0 Contribution 2 Principal Due $0 Contribution 2 Interest Due $0 Contribution 2 Length of Loan 30 years Contribution 2 Interest Cost 3.70% (SRF at 2.5% per Linam testimony A.13; 3.70% for municipal debt) AFUDC Rate % (approximation based on Stephenson testimony, Attachement 5) AFUDC Rate thru % (approximation based on Stephenson testimony, Attachement 5) Equity Ratio 0% (assume 100% debt financed) Equity Rate of Return 9.99% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Debt Ratio 100% (assume 100% debt financed) Debt Interest Cost 4.70% (AWW Capital Corp Baa2 credit rating) Effective Tax Rate % (Linam testimony A.12) Gross-Up Factor (based uncollectibles rate and state and federal tax rates as shown) Ad Valorem Tax Rate 1.050% (Stephenson testimony A.57; Linam testimony A.12) Gross-Up for Uncollectibles % ( % uncollectible revenues) Discount Rate for NPV 5.00% Total Acre-Feet Production 9,000 Depreciation Summary: Remaining Years of Book Depreciation 40 Composite Depreciation Rate 2.50% (based on 40 year life; Linam testimony A.12)) 2,986,469 Cumulative Book Depreciation 2,986,469 Remaining Years of Tax Depreciation 25 Tax Depreciation Rate 4.00% (based on 25 year tax life) 4,865,421 Cumulative Tax Depreciation 4,865,421 Excess of tax over book 1,878,952 Deferred Taxes 765,673 Page 21

23 Scenario E-2: 100% with Cal-Am Tax-Exempt Debt Financing / With Surcharge 2 20,000,000 Ad Valorem Taxes 18,000,000 16,000,000 Purchased Water Cost O&M Expense Total Return Required (Pre Tax) Depreciation & Amortization SRF Loan Repayment Public Agency Contribution Repayment 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000, Page 22

24 Scenario F: Traditional Equity Portion with Cal-Am Tax-Exempt Financing w/ Public Backstop for Debt Portion (Repaid thru Surcharge) / With Surcharge 2 Revenue Requirements Calculation Capital Costs $0 $11,920,000 $27,460,000 $50,010,000 $124,178,587 Surcharge #1 AFUDC Amount 0 59, , ,284 5,588,720 AFUDC Excluded from ROR 0 37, , ,888 4,034,234 Plant(Transfer to CWIP) 0 11,979,899 39,698,290 90,358, ,125, ,125,882 Accumulated AFUDC Excluded from ROR 0 37, , ,016 4,740,249 4,740,249 Accumulated Depreciation 1,484,424 Cumulative Surcharge 2 0 7,500,000 34,540,000 66,370,000 99,150,000 99,150,000 Cumulative Outside Contributions ,858,664 56,858,664 Cumulative Deferred Taxes 440,208 Rate Base & Return 0 4,465,656 4,915,414 23,431,380 59,814,006 58,071,234 Average Rate Base 0 2,232,828 4,690,535 14,173,397 41,622,693 58,942,620 Equity Return Necessary 5,888,368 Debt Return Necessary 0 Return Necessary, Gross-Up for Taxes 9,911,937 Interest Income Tax Savings, Gross-Up for Taxes 0 Total Return Required (Pre-Tax) 9,911,937 Expenses O&M Expense 0 Purchased Water Cost 0 Ad Valorem Taxes 0 23,445 49, , , ,898 Depreciation & Amortization 1,484,424 Total Expense 2,103,322 Revenues from Expenses, Gross-Up for Uncollectibles 2,108,889 SRF Loan Repayment 3,169,430 Public Agency Contribution Repayment 0 Total Revenue Requirement (Lifecycle) $411,070, ,500,000 27,040,000 31,830,000 32,780,000 15,190,256 NPV of Revenue Requirement (2012 $) $231,484, ,142,857 24,526,077 27,495,951 26,968,187 11,901,963 Cost of Water ($/A-F) $1,688 Assumptions: Purchase Water Annual Cost $0 (per AF and escalation at 1/2 the O&M rate) Reduction After Yr 30 $0 (assumes $76,288,000 at 3.70% for 30 years) Purchased Water in AF 3,500 (GWR included or not) Annual O&M Expense (2017) $0 () O & M Cost Inflation Index 3.0% (combination of 2.0% and 3.23%) Annual Surcharge 2 Contribution $0 $7,500,000 $27,040,000 $31,830,000 $32,780,000 Outside Contribution for Debt? Y Amount ---> $0 $0 $0 $0 $56,858,664 Contribution Principal Due $1,065,660 Contribution Interest Due $2,103,771 Contribution Length of Loan 30 years Contribution Interest Cost 3.70% (assumes MPWMD public credit rated A1/A+) Outside Contribution for Equity? N Amount ---> $0 $0 $0 $0 $0 Contribution 2 Principal Due $0 Contribution 2 Interest Due $0 Contribution 2 Length of Loan 30 years Contribution 2 Interest Cost 3.70% (SRF at 2.5% per Linam testimony A.13; 3.70% for municipal debt) AFUDC Rate % (approximation based on Stephenson testimony, Attachement 5) AFUDC Rate thru % (approximation based on Stephenson testimony, Attachement 5) Equity Ratio 53% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Equity Rate of Return 9.99% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Debt Ratio 47% (Stephenson testimony A.11, A.51; Assumes future capital structure per A ) Debt Interest Cost 5.00% (Linam testimony A.13; Future capital structure per A would be 6.63%) Effective Tax Rate % (Linam testimony A.12) Gross-Up Factor (based uncollectibles rate and state and federal tax rates as shown) Ad Valorem Tax Rate 1.050% (Stephenson testimony A.57; Linam testimony A.12) Gross-Up for Uncollectibles % ( % uncollectible revenues) Discount Rate for NPV 5.00% Total Acre-Feet Production 9,000 Depreciation Summary: Remaining Years of Book Depreciation 40 Composite Depreciation Rate 2.50% (based on 40 year life; Linam testimony A.12)) 1,484,424 Cumulative Book Depreciation 1,484,424 Remaining Years of Tax Depreciation 25 Tax Depreciation Rate 4.00% (based on 25 year tax life) 2,564,689 Cumulative Tax Depreciation 2,564,689 Excess of tax over book 1,080,264 Deferred Taxes 440,208 Page 23

25 Scenario F: Traditional Equity Portion with Cal-Am Tax-Exempt Financing w/ Public Backstop for Debt Portion (Repaid thru Surcharge) / With Surcharge 2 20,000,000 Ad Valorem Taxes 18,000,000 16,000,000 Purchased Water Cost O&M Expense Total Return Required (Pre Tax) Depreciation & Amortization SRF Loan Repayment Public Agency Contribution Repayment 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000, Page 24