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Table A-2 Redwood City Water Financing Plan Recycled Water Project Financing Assumptions Financing Assumptions 1 Total Phase 1 project costs are projected at $72.4 million based on refined cost estimates developed by Kennedy/Jenks. This cost estimate includes contingency allowances and is adjusted for projected cost inflation to construction date. Phase 1 of the project includes a recycled water distribution system serving areas east of Highway 101. The City is financing Phase 1 via a series of water revenue bonds. Phase 2 of the project, if eventually built, will extend the distribution system west of Highway 101 at an estimated cost of $12.8 million. The City anticipates that if it ever pursues Phase 2, the costs will funded by future customers. 2 The City will continue to gradually phase-in required rate adjustments in a steady and predictable manner, to the extent possible, in order to minimize the annual impact on ratepayers. Key drivers of the rate adjustments include: a) wholesale water rates from the SFPUC, which are projected to roughly triple over the next decade, b) new debt service for the recycled water project, and c) operating cost inflation. 3 The City has been funding Phase 1 project costs via a series of bond issues. Water revenue bonds issued in 2005 and 2006 provided about $56.6 million in net bond proceeds. Interest earnings on bond proceeds provided the City with additional funding. The City anticipates funding the remaining $14 million Phase 1 costs via a final bond issue in June 2007. Debt service estimates for the final bond issue are based on slightly conservative estimates of interest rates, a 3D-year bond term, level annual debt service payments, and a cash-funded debt service reserve funds. 4 The legal covenants securing the bonds require the City to increase water rates and fees as needed to a) fund operating and maintenance expenses and 100% of annual debt service, and b) achieve a 120% debt service coverage ratio (total revenues less operating and maintenance costs must be 120% of annual debt service). These are standard covenants for water revenue bonds. 5 Pursuant to the bond indenture, the City has designated $8.3 million of water enterprise fund reserves as Rate Stabilization Funds. These reserves are not restricted in any way and can be used for any purpose at any time. For purposes of achieving the 120% debt service coverage requirement, the City can treat a portion of these reserves as revenues by undesignating or "transferring" Rate Stabilization Fund reserves to the water fund. However, the City would still need to generate 100% debt service coverage without use of the Rate Stabilization Fund. 6 Redwood City will continue to pursue funding from grants and subsidized loans to the extent possible. 7 For planning purposes, the financial projections assume Water Facilities Fees revenues will remain constant at $250,000 per year. However, the projections exclude potential revenues from a proposed Water Capacity Fee that the City may adopt in the near future. This fee is designed to recover the costs of capacity in recycled water infrastructure needed to free up potable water supply to serve new development. The City does not anticipate including revenues from the proposed new Water Capacity Fees in the cash flow projections until the charge is adopted by City Council. BARTLE WELLS ASSOClA rES F:\Jobs\Redwood City11921\ IWater Financial Plan Update 2007 F\Assumptions 2,4/12/2007,6:52 PM Be Page 103 Attachment 5