To: Honorable Mayor and Members of Town Council
From: Mark Marlowe. P.E., Director of Castle Rock Water
Matt Benak, P.E., Water Resources
Title
Discussion/Direction: Chatfield Reservoir Reallocation Project Off-Ramp and Participation Fee Agreement
Body
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Executive Summary
Renewable water storage is a key component of the Town of Castle Rock’s long-term water plan and participation in the Chatfield Reallocation Project gives the Town unique access to additional renewable water sources. The purpose of this memorandum is multifaceted:
1. To provide Council with an update on the Chatfield Reservoir Reallocation Project, including the updated total project cost estimate.
2. To elicit direction from Council on continued participation in the project.
3. To present the Participation Fee Agreement to Council and seek approval to execute.
The project’s program manager, CDM-Smith, has been directing various project design activities since being retained by the Chatfield Reservoir Mitigation Company (CRMC) in November 2015. These design activities include the technical review of environmental functional units or EFUs (EM1); the onsite mitigation to account for State and Federal requirements (EM2); mitigation along Sugar Creek in Douglas County (EM3); offsite environmental mitigation (EM5); marina relocation design (RM1); and onsite recreational mitigation (RM2). In addition to the program management and project design activities, the CRMC formed a Technical Advisory Committee (TAC) to provide assistance and advisement on various technical issues. This group consists of members from the water providers, the State, Federal Agencies such as the U.S. Army Corps of Engineers and U.S. Fish and Wildlife Service, Douglas County and other stakeholders. The Town is represented on the TAC by Matt Benak, Water Resources Manager.
The original preliminary cost estimate in the Water Storage Agreement (WSA) between the U.S. Army Corps of Engineers and the State of Colorado for the project was $134 million ($9.8 million for the Town at our full 1,500 acre-foot subscription). The WSA (and the subsequent Water Provider Agreement (WPA) between the State and the Town of Castle Rock) provided the State and the participants with an opportunity to re-evaluate the preliminary cost estimate for the project. If the new cost estimate exceeded ten percent of the $134 million original estimate, the agreement provides an “off-ramp” for the participants to exit the project.
On October 13, 2017, the State provided notification (Attachment A) that the estimated total project costs are now anticipated to be $171,000,000 ($12.45 million for the Town, assuming a 1,500 acre-foot subscription), which is more than ten percent of the original estimate (28 percent). If the original cost was simply escalated using common construction cost indices, the project cost would be between $160 and $163 million at the mid-point of construction. Pursuant to the WPA, the Town has the right to terminate its agreement with the State and relinquish its Pro Rata Share for a period of 60 days following the date of the notice (by December 12, 2017). If we choose to remain in the project, the total project costs will be adjusted to equal the refined cost estimate, and the Town will have 180 days to fully fund the additional amount of its Pro Rata Share. For the Town, this amounts to an additional $1,796 per acre-foot (AF) of storage space, or an additional $672,000 on the 374 AF of space we currently own.
Staff recommends staying in the project despite the increase. Chatfield Reservoir is an on-stream reservoir located on the South Platte River and Plum Creek. The cost to build a similar reservoir today on the South Platte would undoubtedly be much greater. Within the past year, Castle Rock successfully completed a Water Court case that will allow us to exchange water stored in Chatfield back to the Town. The Town also has an option agreement with the State that allows us to spread out the costs of our investment in Chatfield over a 15 to 20 year period with no interest. Despite the increased cost estimate, staff is considering bringing Council an amendment to our Option Agreement to add another 500 shares as the value of this asset to Castle Rock is increasing now that our water rights case is settled. Finally, the Town has a South Platte River water right that we will be able to use now that Chatfield is moving forward.
It is important to keep in mind that this is still an estimate of the project costs and it is possible that the Total Project Cost could be more or less than this estimate. The good news is that the project has been progressing well and, in fact, construction of some of the on-site improvements is slated to begin mid-November 2017. Staff will keep Council updated as the design and construction progresses and when updated cost information becomes available. Because the Town has an option agreement with the State, we have the flexibility to reduce our participation further if costs increase too much. In fact, we opted to use a deferment year in 2017 so that we could monitor design and construction progress and better understand the overall costs. The flexibility of this option agreement allows us to ensure our level of participation in the project will be consistent with our long term financial capacity.
The other item we are presenting is the Participation Fee Agreement. Essentially, this agreement provides a way for the founding project participants to recover some of their monetary investment if a founding member sells their existing storage shares to a non-participating member and requires a new storage entity to ‘pay their way into’ the project. The key terms of this agreement are:
• Participation Fee - The non-participating member is subject to paying a Participation Fee (calculated as per Exhibit 3 of the Agreement) which equates to $457/AF in 2017 and $560/AF in 2018 and is adjusted annually to account for the CRMC’s operating cost for that year.
• Member-to-Member sale of storage will not be subject to the participation fee. For example, Castle Rock Water’s purchase of optioned shares from the State is not subject to these terms.
• The participating member that is selling units is responsible to get the consent of another participating member to act as the participation fee agent, or obtain the services of an independent title company, escrow agent or trustee. Any fees associated with the transfer of units are to be paid by the Non-Participating Member.
• All participating members are distributed their pro-rata share of the collected participation fee from the Non-Participating Member.
History of Past Town Council, Boards & Commissions, or Other Discussions
In 2004, the Town Council approved a resolution consenting to the South Metro Water Authority (currently the South Metro Water Supply Authority) reserving 1,400 AF of the storage capacity on behalf of its members.
In 2005, the Town signed a Letter of Commitment between the Town of Castle Rock and the Colorado Water Conservation Board (CWCB) to reserve permanent storage space in Chatfield Reservoir if the storage becomes available as a result of this project. The Town’s reserved capacity stood at 1,013.2 AF.
In September 2012, Town Council approved a resolution to submit a letter to the US Army Corps of Engineers in support of the Chatfield Reallocation Project.
Utilities Commission was updated on the status of the project on June 26 and July 24, and October 22, 2013.
Town Council was updated on the status of the project in October 2013.
The Water Resources Committee reviewed this project on May 6, 2014.
On May 28, 2014, Utilities Commission was updated on the status of the recommended reduced participation level of 200 AF. Utilities Commission voted 5-1 approving the recommended reduced participation level with one Commissioner stating that participation at a higher level is preferred.
On June 17, 2014, Council approved a resolution to reduce participation in the Chatfield Reallocation Project from 1,500.3 AF to 200 AF.
On November 18, 2014, Council approved the execution of the articles and bylaws of the Chatfield Reservoir Mitigation Company, the Water Storage Agreement, the Escrow Agreement, and the Water Provider Agreement for the Chatfield Reallocation Project.
On April 21, 2015, the Council was provided with a discussion of the salient points of a draft option agreement with CWCB.
On May 27, 2015 the Utilities Commission unanimously supported the recommendation to Town Council to proceed with entering into an agreement with CWCB for the acquisition of additional project shares over a multi-year period.
On June 16, 2015, Council approved the option agreement for acquisition of additional Chatfield Reservoir project shares from the State of Colorado over time.
On October 5, 2015, the Mayor was presented with execution instructions and original forms for the:
• Articles of Incorporation and Bylaws of Chatfield Reservoir Mitigation Company, Inc.
• Water Provider Agreement
• Escrow Agreement
The Chatfield Storage Reallocation Project refined cost estimate was presented to Utilities Commission on April 27, 2016. The commissioners unanimously recommended that the Town continue its participation in the project.
On May 17, 2016, Town Council was provided with an update on the progress of the Chatfield Reallocation Project.
On May 25, 2016, Utilities Commission was provided with a discussion of the key points for an amendment to the CWCB Option Agreement to buy 1,713 AF of storage shares over the next nineteen years. The commissioners unanimously recommended that staff work with CWCB to development an amendment to the existing CWCB Option Agreement.
In December 2016, the Town closed on an additional 87 AF of storage space, bringing our current total to 374 AF.
On October 25, 2017, Castle Rock Water Commission (formerly the Utilities Commission) was provided with a discussion of the Chatfield Storage Reallocation Project updated cost estimate and off-ramp option, and unanimously recommended the Town continue its participation in the project.
Discussion
The Chatfield Storage Reallocation Project reallocates flood storage space in the existing Chatfield Reservoir located in northwest Douglas County to space that can be used for storing renewable water supplies. The Town of Castle Rock is currently, and has been since 2004, a participant in the Chatfield Reallocation Project. On June 7, 2014, Town Council approved a resolution to reduce the current participation in the Chatfield Reallocation Project from 1,500.339 AF to 200 AF based on staff’s recommendations of the current need for storage in Chatfield by the Town. On June 16, 2015, Town Council approved the option agreement for acquisition of additional Chatfield Reservoir project shares from the State of Colorado over time and in December 2015, the Town closed on an additional 87 acre-feet of storage space, and in December 2016, the Town closed on another 87 AF, bringing the total Town-owned space to 374 AF. In 2017, Castle Rock Water staff elected to defer the purchase of an additional tranche of storage space so that we could monitor design and construction progress and better understand the overall costs. The flexibility of this option agreement allows us to ensure our level of participation in the project will be consistent with our long term financial capacity.
On October 13, 2017, the Colorado Department of Natural Resources (State) provided a redetermination of the project costs. The current cost estimate is now $171 million ($12.45 million for the Town, assuming a 1,500 AF subscription). Because this estimate is more than ten percent of the original estimate ($134 million) and pursuant to the WPA, the Town has the right to terminate its agreement with the State and relinquish its Pro Rata Share for a period of 60 days following the date of the notice (by December 12, 2017). If we choose to remain in the project, the total project costs will be adjusted to equal the refined cost estimate, and the Town will have 180 days to fully fund the additional amount of its Pro Rata Share. For the Town, this amounts to an additional $1,796 per acre-foot of storage space, or an additional $672,000 on the 374 AF of space we currently own.
Staff recommends staying in the project despite the increase. Chatfield Reservoir is an on-stream reservoir located on the South Platte River and Plum Creek. The cost to build a similar reservoir today on the South Platte would undoubtedly be much greater. Within the past year, Castle Rock successfully completed a Water Court case that will allow us to exchange water stored in Chatfield back to the Town. The Town also has an option agreement with the State that allows us to spread out the costs of our investment in Chatfield over a 15 to 20 year period with no interest. Despite the increased cost estimate, staff is considering bringing Council an amendment to our Option Agreement to add another 500 shares as the value of this asset to Castle Rock is increasing now that our water rights case is settled. Finally, the Town has a South Platte River water right that we will be able to use now that Chatfield is moving forward.
It is important to keep in mind that this is still an estimate of the project costs and it is possible that the Total Project Cost could be more or less than this estimate. The good news is that the project has been progressing well and, in fact, construction of some of the on-site improvements is slated to begin mid-November 2017. Staff will keep Council updated as the design and construction progresses and when updated cost information becomes available. Because the Town has an option agreement with the State, we have the flexibility to reduce our participation further if costs increase too much. In fact, we opted to use a deferment year in 2017 so that we could monitor design and construction progress and better understand the overall costs. The flexibility of this option agreement allows us to ensure our level of participation in the project will be consistent with our long term financial capacity.
The other item we are presenting is the Participation Fee Agreement. Essentially, this agreement provides a way for the founding project participants to recover some of their monetary investment if a founding member sells their existing storage shares to a non-participating member and requires a new storage entity to ‘pay their way into’ the project. The key terms of this agreement are:
• Participation Fee - The non-participating member is subject to paying a Participation Fee (calculated as per Exhibit 3 of the Agreement) which equates to $457/AF in 2017 and $560/AF in 2018 and is adjusted annually to account for the CRMC’s operating cost for that year.
• Member-to-Member sale of storage will not be subject to the participation fee. For example, Castle Rock Water’s purchase of optioned shares from the State is not subject to these terms.
• The participating member that is selling units is responsible to get the consent of another participating member to act as the participation fee agent, or obtain the services of an independent title company, escrow agent or trustee. Any fees associated with the transfer of units are to be paid by the Non-Participating Member.
• All participating members are distributed their pro-rata share of the collected participation fee from the Non-Participating Member.
Budget Impact
By remaining in the project, the Town will owe an additional $672,000 on the 374 AF of space we currently own. This money will be due in mid-2018. A budget amendment will be necessary in 2018 to cover this cost and our planned purchase of additional Chatfield shares. Staff will continue to monitor the financial changes to this project and adjust the project budget (Account Number 211-4375-443.77-29, Chatfield Reallocation) accordingly under the assumption that we will continue to participate in our full optioned shares.
Staff Recommendation
Staff recommends that Town Council approve continued participation in the Chatfield Reallocation Project and approve execution of the Participation Fee Agreement by the Director of Castle Rock Water.
Proposed Motion
N/A
Attachments
Attachment A: October 13, 2017 Letter from CDNR
Attachment B: Participation Fee Agreement
Attachment C: CSRP Total Costs