To: Honorable Mayor and Members of Town Council
From: Mark Marlowe, Utilities Director
Matt Benak, Water Resources Manager
Kurtis Cotton, Water Resources Program Analyst
Title
Resolution Approving the Second Amendment to Option Agreement and Joint Escrow Instructions between the Town of Castle Rock Water Enterprise and Box Elder Creek Properties, LLC and Authorizing the Exercise of the Option to Close
Body
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Executive Summary
The purpose of this memorandum is to request Town Council approval of the second amendment to the Box Elder option agreement and approval to purchase the Box Elder well field in accordance with the option agreement signed in 2014 and the first and second amendments to this agreement. The second amendment to the Box Elder option agreement is to allow us to close into escrow until a Water Court case filed several years ago by Box Elder Properties is dismissed with prejudice. This amendment also prevents Box Elder Properties from filing any future water rights cases in the Box Elder watershed which could impact Castle Rock's use of the Box Elder well field and related water rights.
The well field is one component of the overall hybrid solution to the Alternate Source of Water Supply Project. Purchasing the well field in accordance with the terms in the option agreement signed in 2014 has been reviewed with the Utilities Commission. Based on the progress completed in acquiring the majority of the water rights for the well field and due diligence on the well field and related assets, staff, and the Utilities Commission recommend that Town Council approve moving forward with the purchase as provided for in the option agreement including the first and second amendments, and in the resolution in Attachment A. If Council approves the purchase and closing of the purchase before December 1, 2016, the price will be $8.3 million. If closing occurs after December 1, 2016, the price increases to $9.4 million. A request for a supplemental appropriation was made on August 16, 2016, and approved by Council for the funds required to complete this transaction at a cost of $8.3 million.
The Box Elder project includes the following three components: (1) the Box Elder well field, (2) water rights acquisition, and (3) treatment and transmission infrastructure. Items 1 and 2 were designed to progress in tandem. Item 3 is part of the longer term renewable water program, and infrastructure is planned to be phased as our customer water demand increases. The purpose of the Box Elder well field is to serve as a point of diversion for acquired water rights. In other words, the place where the water is actually pumped out of the ground for transmission back to Castle Rock.
An option agreement on the well field was negotiated with the Box Elder well field owners in 2014 that provided a revised agreement that better fit the Town’s goals versus the original proposal. Key terms of the option agreement included:
• A 5-1/2 year option with annual payments as follows:
o $50,000 (during the first six months)
o $100,000 at the end of year 1
o $200,000 at the end of year 2
o $300,000 at the end of year 3
o $300,000 at the end of subsequent years
o Each payment is non-refundable but accrues towards the final purchase price
• A base purchase price of $9.4 million for the well field, 850 acres of land, non-renewable water rights, 300 acre-feet (AF) of consumptive use Henrylyn Irrigation District (HID) water rights, and 5 shares of FRICO-Barr water rights.
• An incentive was offered to close early on the well field and associated assets with the base price dropping to $6 million if closing occurred six months after signing of the option, $7.18 million if it occurred within the next year, or $8.3 million within another year (2-1/2 years from option agreement signing).
To date, the Town has paid $650,000 towards the option agreement. The option provided the Town with time to secure adequate water rights that could be used in conjunction with the well field, the second part of the project. Town staff has worked with Stillwater (in accordance with the brokerage agreement approved by Town Council) on multiple water rights opportunities and has purchased or has under contract up to 1,770 AF of renewable water that can be used with the Box Elder well field including water already changed in Water Court to be used as augmentation water, and some other irrigation water rights that have already been changed for municipal use. Of the 1,770 AF, the Town owns 770 AF and has 1,000 AF under contract. While there is no guarantee that the Town will close on the 1,000 AF of water, due diligence is approximately 75-80% complete and no fatal flaws have been identified.
Ultimately, the Town is looking for a package of water rights totaling 2,500 acre feet that provide the most cost effective approach to the hybrid project. Since the Town is finishing the securing of up to 1,770 AF of the 2,500 acre-foot goal, staff recommends taking advantage of the early closing incentive to reduce the cost of the well field by $1.1 million from the base price. Regardless of whether the full 1,770 AF is secured by the end of this year, staff believes now is the best time to close on the well field. Additional water rights can be obtained and the $1.1 million in savings on the well field can help with this if needed. This savings will benefit our customers by either reducing the overall investments needed in the project, or offsetting higher costs to acquire the remainder of the needed water rights, or to construct the infrastructure needed to move the water from the well field back to Castle Rock.
Once the Town finalizes the purchase of the well field in combination with the water rights already secured, work can continue on the final aspect of the project which includes the planning and design of infrastructure to treat and transport water from the site and to augment Box Elder Creek and the Water Court application for the project. One key piece of the infrastructure on which progress is being made is the Western Pipeline. Castle Rock is a shared owner in this critical piece of infrastructure as part of the WISE project. This same pipeline will be part of the infrastructure that will be needed for the Box Elder project. Another important piece of infrastructure is under contract. This infrastructure is a pipeline (Keenesburg Pipeline) that will be a key piece of the needed infrastructure to allow the Town to augment Box Elder Creek with some of the water rights under contract. Preliminary planning continues on the other required infrastructure and partnerships with other local entities.
History of Past Town Council, Boards & Commissions, or Other Discussions
In August 2009, Town Council unanimously approved participation in the Denver - Aurora - South Metro Intergovernmental Agreement to identify and evaluate opportunities to address long-term water supply needs for all Denver-metro communities in the most efficient and cost-effective manner possible.
In 2011, staff was directed by Town Council to evaluate other potential water supply projects (Alternative Source of Water Supply Projects) to ensure that Castle Rock fully understood the options available in addition to WISE. The Town developed a Request for Proposals (RFP) process that could accomplish that in a public, transparent process.
Through various public meetings in 2012, Town Council considered the risks, benefits, and costs of all of the proposals submitted including a hybrid option that couples the WISE project with one of the other proposals. As a result of these meetings, Town Council directed staff to focus efforts on a scaled back (hybrid) renewable water project (2,000 - 4,000 acre-foot solution) and explore in more detail, the hybrid option. Staff has been providing Town Council regular updates to the progress of the hybrid water supply option.
On February 19, 2013, staff provided an update to Town Council on the Alternate Source of Water Supply Projects.
On March 27, 2013, staff provided the Utilities Commission an update of the status of the ongoing negotiations with WISE and Stillwater Resources and announced that the discussions were continuing regarding the Western Pipeline and progress of receiving the necessary signatures for the Colorado River Cooperative Agreement (CRCA).
On May 7, 2013, Town Council unanimously approved the South Metro WISE Authority Formation and Organizational Intergovernmental Agreement (IGA) which made the Town of Castle Rock one of ten members of the South Metro WISE Authority.
On June 18, 2013, staff provided an update to Town Council on the Alternate Source of Water Supply project.
On August 28, 2013, staff informed the Utilities Commission that the WISE Delivery Agreement had been executed by all parties and that internal planning for the local infrastructure was commencing. Staff also reported that meetings are continuing with municipalities north of Denver regarding the Box Elder project and that a draft option agreement is being negotiated.
On September 17, 2013, staff provided an update to Town Council on the Alternate Source of Water Supply Projects.
On September 25, 2013, staff informed the Utilities Commission that the CRCA contingency was close to being complete and that the WISE agreement deadline may be extended six months. Staff also mentioned that the Box Elder ground water modeling is being conducted to assess the flow of the alluvial wells on the property and that staff is reviewing an option agreement that would allow the Town to exercise an option for up to 3-1/2 years before purchasing the property.
On October 23, 2013, staff informed the Utilities Commission that the CRCA contingency has been met but that the WISE Authority has recommended extending the WDA by one year in order to satisfy the remaining contingencies. By general consensus, the commissioners supported this deadline extension.
On December 3, 2013, Town Council unanimously approved extension of the deadline for an additional year to meet the three contingencies in the South Metro WISE IGA.
On January 7, 2014 Town Council approved an intergovernmental agreement (IGA) with Dominion Water and Sanitation District (Dominion) which will allow Dominion to move their WISE water through the Town’s distribution system. The first capacity reservation fee ($50,000) has already been received from Dominion.
The Utilities Commission recommended Town Council approve the Box Elder option agreement as presented on March 5, 2014.
On March 11, 2014, staff provided an update to Town Council on the WISE and Box Elder projects, including an overview of the key terms of the Box Elder well field option agreement.
On April 1, 2014 Town Council approved the 5-1/2-year option agreement for Box Elder Creek Well Field. The Town paid $50,000 for the six-month option requirement of the option agreement.
On April 23, 2014, staff provided the Utilities Commission with an update of the Western Pipeline Agreement.
The draft western pipeline purchase agreement and the key deal terms for lease purchase agreement for the WISE project were brought to the Utilities Commission on May 28, 2014. Utilities Commission recommended Council proceed with approval of the purchase agreement and the related lease purchase agreement with Dominion.
On June 17, 2014, Town Council approved the Western Pipeline Purchase Agreement.
On July 22, 2014, Town Council approved a $4.3 million Lease-Purchase Agreement with Dominion Water and Sanitation District.
Utilities Commission was updated on the Rothe Water Rights on May 28, 2014. On July 30, 2014, Utilities Commission recommended that Town Council proceed with approval of the contract assignment for the purchase and sale of land and water rights associated with the Rothe Recharge Plan.
On August 19, 2014, Town Council approved the Rothe Water Rights Purchase for up to 770 AF of water rights to be used as augmentation water for the Box Elder Creek Well Field. This purchase closed on September 17, 2014 for a total cost of $5,460,000.
On August 27, 2014, Utilities Commission reviewed the key terms of the Modifications Agreement and recommended it to Town Council for approval.
On September 16, 2014, Town Council approved the execution of the Modifications Agreement, key terms of the Operations Agreement, key terms of the Joint Use Agreement, and associated costs for other key WISE Project components. The resulting closing of the Western Pipeline essentially satisfied the Western Pipeline contingency in the Water Delivery Agreement.
On October 1, 2014, the Town paid its second option payment for the Box Elder Well Field of $100,000. This payment extended the due diligence period to October 1, 2015.
On October 22, 2014, staff provided the Utilities Commission with an update of the Alternate Source of Supply Projects.
On November 18, 2014, Town Council approved a resolution to participate in the Ridgegate Pipeline Participation Agreement for the design of the Ridgegate Pipeline and other local infrastructure needed to move WISE water through PWSD to the Town of Castle Rock. Town Council was updated on the status of the Rueter-Hess Reservoir permit amendment and that a draft permit had been received, which for practical purposes, satisfied the last contingency in the Water Delivery Agreement.
On December 16, 2014, staff provided an update to Town Council on the Alternate Source of Water Supply Projects.
On March 17, 2015, Town Council approved additional funds ($368,337) to implement the agreement regarding modifications to shared infrastructure of the WISE Western Pipeline by the South Metro WISE Authority.
On April 21, 2015, staff provided an update to Town Council on the Alternate Source of Water Supply Projects.
On June 24, 2015, staff provided the Utilities Commission with the details of the surface use lease agreement for the Rothe Property. Utilities Commission recommended moving forward and finalizing the lease agreement with the adjacent landowner, Sublette, Inc.
On August 18, 2015, Town Council approved Burns & McDonnell, Inc. to design approximately five miles of pipeline that will be a key piece of infrastructure in order for the Town to accept WISE supplies.
On August 18, 2015, Town Council approved a Surface Use Agreement with Sublette, Inc. to use the Rothe Property for recreation activities, while managing the property on the Town’s behalf.
On December 9, 2015, staff updated the Utilities Commission on the status of the WISE and Box Elder projects, including the 1041 Permit process being considered by Weld County and associated with the Box Elder project.
On January 5, 2016, staff provided an update to Town Council on the Alternate Source of Supply Projects.
On April 16, 2016, Town Council approved a resolution to execute the Intergovernmental Water Infrastructure Cost Sharing, Construction and Capacity Allocation Agreement between the Town of Castle Rock and Parker Water and Sanitation District.
On August 16, 2016, Town Council approved a resolution to execute purchase and sale agreements for the PV, LLC Water Rights and the Keenesburg Pipeline with PV, LLC and Pioneer Metropolitan District No. 3, respectively, and a supplemental appropriation for the purpose of closing on the Box Elder well field.
On September 6, 2016, Town Council approved an amendment to the Box Elder Option Agreement extending the closing option date from October 1 to December 1.
On October 18, 2016 Town Council approved the $300,000 payment, the next installment of the option on the Box Elder well field.
On October 26, 2016 the Utilities Commission recommended Town Council approve the closing on the Box Elder well field prior to December 1, 2016.
Discussion
Box Elder Well Field and Farm
The first piece of the puzzle for the alternate northern water supply is the diversion system for future water supply rights that the Town may obtain in the South Platte River basin. The Box Elder Farm was put forward as just such a diversion. This farm is located approximately six miles east of Lochbuie, CO in southern Weld County as shown on Attachment B. The farm contains eleven existing permitted alluvial wells, 850 acres of property, approximately 300 AF of consumptive use HID water rights, and 300 AF per year of Ground Water Management Subdistrict of the Central Colorado Water Conservancy District (Central GMS) irrigation water rights.
Based on modeling and due diligence done on the project by the Town, the option agreement signed with Stillwater for the Box Elder well field was as follows:
• No earnest payment;
• An option agreement of up to 5-1/2 years with option payments of $50,000 for first six months followed by $100,000, $200,000 and $300,000 for each subsequent year all going towards final purchase;
• An extended option after 5.5 years might be available depending on project status but is not part of the current agreement;
• Total purchase price of $9.407 million;
• Current purchase price includes 11 wells, 850 acres of property, and all of the non-tributary groundwater rights under the property, the HID water and 5 shares of FRICO-Barr water.
• Additional Central GMS consumptive use contracts of approximately 300 AF for $500,000 could be added to the deal;
• Box Elder will retain mineral rights under the Farm. A separate surface use agreement will be negotiated if those rights are to be used.
The Box Elder owners proposed to offer the Town an incentive to close on the Box Elder Farm early. The list below shows a schedule of timing of closing and the cost to the Town:
Close in Year Total Cost
2014 $6,045,944
2015 $7,178,558
2016 $8,313,173
2017 $9,407,000
2018 $10,535,840
2019 $11,664,680
The benefits of the current option include:
• The cost is less than the amount budgeted for the project;
• The amount of water that can be diverted in a sustainable manner under both a constant pumping and municipal curve is approximately 2,500 AF and within the constraints established for the hybrid approach;
• This option provides the lowest near term cost and allows us to continue our due diligence for up to 5-1/2 years before making a final commitment;
• This option provides the most time to secure renewable water rights prior to investing in the well field:
• With the HID water, the Town would have the ability to engage on how the Henrylyn District operates which is important for the long term sustainability of the well field.
There are few drawbacks to the current option. The primary risk continues to be the securing of appropriate water rights and the water court requirements to put these rights to municipal use. Although the water rights secured to date significantly reduce this risk.
Securing Water Supply
Securing of water supply was put on hold pending the Weld County 1041 Permit process outcomes. The process now only applies to pipelines 16 inches and larger. Staff believes that our project infrastructure will be less than this size. Staff has worked with Stillwater on identifying water rights that may be available for the Town to secure. The potential costs and timing of a significant portion of the various water supplies have been evaluated. These supplies include recharge credits that are already decreed for augmentation and potential exchanges from rights downstream of the confluence of Box Elder Creek and the South Platte River. The Town will continue to work with Stillwater in securing another 700± AF of water rights for the project.
The Town’s purchase of the Rothe Property was a major step forward towards renewable water rights acquisition. These water rights can be used regardless of whether the Box Elder project proceeds or not. On August 19, 2014, Town Council approved the contract assignment and subsequent purchase of the Rothe Recharge water rights which can be used as an augmentation water source in conjunction with the Box Elder Creek Well Field for the Alternate Source of Water Supply Project hybrid solution. The Rothe Recharge water rights could potentially account for 770 AF of this augmentation water which is approximately 30% of the total water that is to be acquired for the project. The purchase price for the agreement was $5,200,000 which included an existing well, 640 acres of property, and an existing easement. A 5% brokerage fee of $260,000 was also paid as part of this agreement to Stillwater in accordance with the Town’s existing brokerage agreement dated February 19, 2013. This purchase deal closed on September 17, 2014.
The general concept of the Rothe Recharge Project is that water can be diverted from the South Platte River at the Riverside Canal which is located east of Greeley under a water right with an effective 1988 priority date. This water is delivered from the Riverside Canal into several recharge ponds which then makes its way through the alluvial sands as groundwater return flow to the South Platte River approximately 16 miles downstream of the point where Box Elder Creek theoretically enters the South Platte River. The hydrogeologic transport of this water through the alluvium takes a number of years. The decree in Colorado Water Court Case No. 89CW027 defines the terms and conditions for operation of this project, including the specific timing of the recharge credits.
On August 16, 2016, Town Council approved Resolution 2016-079 approving the contract for purchase and sale of PV, LLC water rights and Resolution 2016-080 approving the contract for purchase and sale of water line capacity in the Keenesburg pipeline. Due diligence is currently being conducted on these two contracts and if no unresolvable issues are uncovered the purchase will provide 1,000 acre-feet of renewable water that can be used with the Box Elder project and a pipeline that can be modified to transport the water to Box Elder Creek. As of the date of this memo, no fatal flaws have been identified. The current schedule is to close on these water rights and the pipeline before the end of the year.
Town Council approved a lease agreement with the Town of Wiggins in January 2016 for the Town of Wiggins to lease excess Rothe Recharge credits. This allows the Town to recoup a portion of the purchase price, thus, decreasing the overall financial impact to the Town. Staff will look for opportunities to lease the PV, LLC water as well assuming closing goes forward.
Infrastructure
Leonard Rice Engineers (LRE) completed a detailed assessment of the groundwater model that forms the basis for the Box Elder proposal. Additional questions were identified but LRE could not continue as our expert on this project due to potential conflicts with other water rights being pursued or protected.
The Town since hired Miller Groundwater Engineering, LLC through our water rights attorneys. Additional field data has been collected as a part of this effort, and the model has been revised and optimized. Based on that additional data and the revised/optimized model, Miller Groundwater Engineering LLC was able to identify the sustainable yield of the well field under both a constant year round pumping scenario and a municipal curve pumping scenario (i.e. timing water demands and pumping at the well field with actual demands in our system including increased summer usage and decreased winter usage).
The results of these analyses indicate that sustainable yields under constant pumping are 2,100 to 3,100 AF per year. Under our municipal demand curve, sustainable yields are 2,300 to 2,700 AF per year. The original response to the RFP from Stillwater indicated an estimated capacity of 4,000 AF per year. The Town's current hybrid solution seeks 2,500 AF per year of water from the other northern supplies and 1,000 AF per year from WISE. As such, this well field capacity is adequate to meet the needs of the Town’s hybrid solution.
Castle Rock has been in discussions with East Cherry Creek Valley (ECCV) regarding the potential to purchase treatment capacity in their existing water treatment facility located along I-76 in Brighton. This treatment plant feeds the North South Pipeline in which Castle Rock already owns capacity. This treatment plant is a reverse osmosis plant and could treat the water from Box Elder Creek or the PV wells with no issue. Costs for capacity are being discussed with ECCV. Very preliminary cost estimates show capacity costs of approximately $6 million per million gallons per day of treated capacity (i.e. at 2,500 AF, the reserved treatment capacity would be approximately $13.4 million).
The core WISE infrastructure including ECCV’s Western Pipeline will be used as an integral part of bringing water from Box Elder to Castle Rock. To that end, the pipeline negotiations with Denver and ECCV are ensuring that adequate capacity is available each year to move all of the potential future supplies that will be diverted from Box Elder.
Budget Impact
A request for a supplemental appropriation was approved by Town Council on August 16, 2016, to allocate $7,661,406 to accommodate closing on the Box Elder Option Agreement this year. Funds were previously planned for use in 2017 for this purpose, however, with the PV, LLC agreement in place, staff believes we are able to proceed with the Box Elder Agreement and will save approximately $1.1 million by entering into this agreement in 2016. There are sufficient funds in the Alternate Source of Supply account (211-4375-443.77-30) to complete this purchase.
Staff Recommendation
Staff recommends Town Council approve the second amendment to the Box Elder Option Agreement and proceed to close on the option agreement for purchase of the Box Elder well field as provided in Attachment A.
Proposed Motion
“I move to approve the Resolution as introduced by title.”
Attachments
Attachment A: Resolution
Attachment B: Location Map