Exploring Private FinancingExploring Private Financingfor Water Infrastructurefor Water Infrastructure

Prescott Valley, ArizonaPrescott Valley, Arizona

John Munderloh John Munderloh

Water Resources ManagerWater Resources Manager

Prescott Valley, AZPrescott Valley, AZ

Town of Prescott ValleyTown of Prescott Valley• Founded 1978• 38,000+ people• 44,000 in water service area• 18,000 service connections• Provide municipal water to people, businesses

and cattle • 5,100 feet above msl • 12” annual rainfall

Prescott Valley WaterPrescott Valley Water(circa 2005)(circa 2005)

• In water business for about 8 years

• 2004 IGA with Prescott – Big Chino Water

– Town needed $ to pay its share

– Current customers did not want to pay for it

– Rates and impact fees from future customers are years away

• Water Supply (CAWS) for existing platted lots only

– Supply of platted lots likely to be consumed by 2012

• Need water rights for planned development, money to pay for water infrastructure, and infrastructure to prove up the water right

Catch-22Catch-22

Breaking the CycleBreaking the Cycle

• Explored if Big Chino water rights (ARS 45-555(E)) have value to pay for project.

• ADWR concluded that uncertainties about pipeline construction would not meet qualifications for an assured water supply.

• Town concluded that water rights not meeting AWS criteria have very little value

Effluent as an AWS SupplyEffluent as an AWS Supply• Town asked ADWR to recognize credits for

effluent that has not yet been recharged.• ADWR agreed that future effluent credits would

meet AWS criteria based on:1. Existing and platted lots based on CAWS (pre-

declaration)

2. Existing infrastructure to capture and treat wastewater

3. Existing permitted capacity in the Town’s recharge facility

4. Demonstrated annual recharge credits

First Public Water AuctionFirst Public Water Auction

– Auction process used to sell other excess Gov’t properties

– Transparent process – no backroom deals

– Generate highest and best value for community

– True market value for water resources (typically subsidized by governments)

Water Sale RequirementsWater Sale Requirements

• Water must be used in Prescott Valley

• Water rights can be re-sold

• Must be used within 25 years or Town regains control of water rights

• Town gets full payment at sale

Auction DayAuction Day

• Held auction in October, 2006

• Had no conforming bids, one non-conforming bid

• We failed, but we made first contact with private water equities

Aqua Capital –Aqua Capital –Price Floor AgreementPrice Floor Agreement

• Negotiated more favorable (flexible) terms to attract private investors

• Developed a Price Floor Agreement– Aqua Capital agreed to take deal at a pre-

negotiated price– Town can sell at a better price (but pays a

breakup fee)

• Price Floor Agreement and Auction Bid documents conformed in all aspects except unit price of the effluent.

Price Floor Agreement (cont.)Price Floor Agreement (cont.)

• Price Floor established minimum opening bid (>$19,500 per ac-ft)

• Town obtained an insurance policy - a guaranteed purchaser.

Auction Day – Round Two Auction Day – Round Two

Qualified Bidders:– Aqua Capital Management

– PV Developers Consortium

– Water Property Investors

Winning Bid:Winning Bid: Water Property Investors, LLCWater Property Investors, LLC $24,650/acre-foot$24,650/acre-foot 2,724 acre-foot total package 2,724 acre-foot total package valued at $67 millionvalued at $67 million

www.waterinv.comwww.waterinv.com

AwardsAwards

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

Some lessonsSome lessons

• Need a “Bridge” to fill time gap between loan repayment and revenue stream

• In this case “Bridge” financing was based on existing infrastructure and water supplies (WWTP & Effluent)

• Water rights have value only if AWS-eligible• As a water provider, we know water, not water

markets• Private sector is better at structuring risks and

terms of a deal

Exploring Private FinancingExploring Private FinancingBig Chino ProjectBig Chino Project

• Expressions of Interest from 13 multi-national firms

• Eight firms met to provide thoughts on how they might deliver the project

• Common theme:– Financing package can be structured multiple

ways– Risk is shared or allocated to party best suited

to manage it– The public partner needs a P3 expert that can

speak the language and be their advocate

Sample Finance Options – P3Sample Finance Options – P3

• Duration of Equity Agreement (BOOT)• Graduated payment related to increased water

demand• Take or Pay • Commodity marketing • Pledge user fees• Combine distribution utility and conveyance

infrastructure to develop immediate revenue stream

Request for QualificationsRequest for Qualifications

• Finance, Law and technical services - 37 responses

• Lesson – pick the financial expert first, then they will advise about the other fields of expertise