Eric S. Petersen, Law Partner Hawkins Delafield & Wood LLP New York, NY

United States Conference of MayorsUrban Water Council2005 Urban Water SummitSeptember 30, 2005Albuquerque, New Mexico Hawkins Delafield & WoodLLP Eric S. Petersen, Law PartnerHawkins Delafield & Wood LLPNew York, NY

PROJECT ELEMENTS • 4 MGD reverse osmosis treatment plant with pretreatment • 8 groundwater extraction wells • 5,000 acre feet annual production • Raw and finished water pump stations and transmission lines • Brine disposal line

CHALLENGES • Limited staff availability • Limited expertise in groundwater treatment technologies • Aggressive schedule to meet deadlines for $250 per acre foot subsidy from Metropolitan Water District

PROJECT GOALS • Assure adequate water supply through local sources • Avoid constructing large water reservoir • Accelerated schedule • Improved technology • Single source responsibility • Performance – based contract • Private sector financing risk

PROCUREMENT GOALS (1): EARLY PRICE CERTAINTY DBB • City design costs 6 -10% of construction cost • Bidder's price may exceed designer's estimates • Project may be delayed or re-designed DBO • City design costs 1-3% of construction cost • Proposers design to level necessary to guarantee price • City obtains price and performance guarantees for low cost

PROCUREMENT GOALS (2):CHANGE ORDERS MINIMIZED DBB • Bid protests can be common • Construction monitoring is 6-8% of construction cost • Change orders can be prevalent • Litigation often accompanies contract awards and change order disputes DBO • Proposals protests are uncommon • Construction monitoring is 1-2% of construction cost • Change orders are rare • Procurement Litigation is rare

DBO PROCUREMENT • CA Government Code 5956 • RFQ/RFP Process • Concurrent Price, Non-Price Review • “Best Value” • Staff Selection • Council Contract Approval

TIMEFRAME • 1993 – 2000 planning • 2000 – RFQ Process (Eco Resources, Earth Tech, Ionics) • 2001 – RFP Process • 2002 – Contract Execution and Financing • 2003 - 2004 – Permitting Construction and Commissioning • 2005 – Operations

PARTICIPANTS • City of San Juan Capistrano (CVWD) • Advisors – Pirnie and Hawkins • Contractor Team – Eco Resources, Boyle Engineering, and ARB, Inc. • Guarantor – Southwest Water • Financing – Lehman Brothers and AMBAC bond insurance

CITY RETAINED RIGHTS AND RESPONSIBILITIES • Ownership of assets • Ownership of system revenues • Setting user rates • Capital planning • Bond financing (tax-exempt) • Securing sites and rights-of-way • Obtaining water rights (San Juan Basin) • Obtaining MWD Subsidy

PRICING AND PERFORMANCE GUARANTEES • Fixed Design-Build Price ($25 million) • Fixed Annual Service Fee ($1.1 million); Electricity ($1.0 million) • Water Treatment (7 enhanced standards) • Water Delivery (5,280 acre feet/year) • Production Efficiency (80%) • Hydraulic Transients • Electricity Usage (Guaranteed Maximum Utilization of 9,092,300 KWH/year and Guaranteed Max Demand of 1,275 KWH)

RISKS TRANSFERRED (1) • Internal disputes among designer, builder, operator, and equipment supplier • Design, permitting, construction and operating cost overruns • Scheduled Acceptance Date (2 years: permitting, design, construction, commissioning, acceptance testing) • Extension Period

RISKS TRANSFERRED (2) • Subsurface geotechnical risk • Regulatory compliance (fines, penalties) • Capital maintenance risk (major maintenance, repair and replacement) • Energy consumption excesses • Loss of MWD subsidy due to Company non-performance

FOCUS ON PERMITTING RISKS • DHS Domestic water supply permit • Pilot testing • Terms and conditions • Delay • Non-issuance • Payment for permitting design costs

RISKS NOT TRANSFERRED (1) • “Uncontrollable Circumstances” • Pre-existing environmental conditions • Specified site conditions • Buried infrastructure repair costs • Changes in law • Force majeure

RISKS NOT TRANSFERRED (2) • Raw water quality exceedencers • General electricity rates (Indexed) • General price inflation (Indexed) • General interest rates

SECURITY FOR PERFORMANCE • Southwest Water (Parent Guaranty) • Performance and bonds • Letter of credit (1.5 years debt service – for AMBAC) • No stated monetary limit on liability

DBO SAVINGS • Source of savings • Core competency • Competition as to design; operator-driven • Competition as to operation • Cooperative relationship between designer, builder and operator • Smaller contingency allowances • Bulk consumables buying power • Broader technology access • Preventive v. breakdown maintenance • Optimized balance between capital and operating costs • Excessive redundancy eliminated

FINANCING PLAN • No SRF funding • City revenue debt • Enterprise fund • Tax-exempt (IRS Rev. Proc. 97-13) • Ambac Bond Insurance • Feasibility study

CONTRACTOR FINANCING SUPPORT • City debt cancelled if Company defaults • Directly transfers “completion” and “performance” risks to Company • Southwest repays Ambac up to $6.0 million • Ambac has “cure rights”

MUNICIPAL CONTROL • Comprehensive asset development and management • Minimum design requirements and quality standards • Performance guarantees (repairs, fines, damages) • Costs guaranteed • Management by “full-service” contract • Vigorous, broader competition and cooperation • Convenience termination rights (10 years)

LESSONS LEARNED • Allow full vendor comment on proposed transaction – and listen • Private financing and siting complicates the transaction • Minimum design requirements are key • Early pilot testing is advisable • Attempted transfer of excessive risk is counter productive

INGREDIENTS FOR SUCCESS • Initial strategic planning • Thoughtful, well developed RFQ/RFP • Creative and responsive proposals • Clear, comprehensive contract • Full proposer due diligence opportunity • Fair and balanced risk allocation • Outstanding leadership

Eric S. Petersen, Law Partner Hawkins Delafield & Wood LLP New York, NY