To: Honorable Mayor and Members of Town Council
From: Mark Marlowe, P.E., Director of Castle Rock Water
Matt Benak, P.E., Water Resources Program Manager
Kurtis Cotton, P.E., Water Resources Program Analyst
Title
Resolution Approving an Amended and Restated Town of Castle Rock / Dominion Water and Sanitation District Canyons Pipeline Capacity License Agreement
Body
________________________________________________________________________________
Executive Summary
An important component of Castle Rock’s long term water portfolio is completion of the WISE project infrastructure and a key part of that infrastructure is a pipeline section and pump station known as the Canyons Pipeline (shown in Attachment B). The purpose of this memorandum is to request Town Council approval of a Resolution (see Attachment A) approving the Amended and Restated Capacity License Agreement with Dominion Water and Sanitation District (Dominion) to fund Dominion’s share of the Canyons Infrastructure. The original agreement will be repealed and replaced with this amended and restated agreement. Parker Water & Sanitation District took the off-ramp with the previous design-build contractor, Western Summit, because they were not able to come to an agreeable negotiated price with the Western Summit led design-build team.
The construction of this infrastructure is being managed by Parker Water and Sanitation District (PWSD) and built by Reynolds, a subcontractor to Overland Contracting, Inc. The Town will purchase Dominion’s capacity in the pump station, equipment, pipeline and associated appurtenances and license it back to Dominion over a five-year period. The benefits of the proposed Capacity License Agreement include additional funds to Castle Rock from Dominion to help offset future capital costs, a slight reduction in future needed rate increases, access to additional pipeline capacity for the next five years, and strengthening of a partnership which has the potential to save the Castle Rock Water and customers even more money going forward. Staff and Castle Rock Water Commission have reviewed the benefits of this Capacity License Agreement and both parties recommend that Council approve this agreement.
The Capacity License Agreement with Dominion for the Canyons infrastructure is provided in Exhibit 1. Key terms of the final Capacity License Agreement with Dominion are below:
• Town will fully fund the pro rata shares of its and Dominion’s portion of the infrastructure. The Canyons development will require 5.3 million gallons per day (MGD) of capacity in the system, while Castle Rock will purchase the remaining 13 MGD (based on a pipeline flowrate of 18.3 MGD at a velocity of 4 feet per second). Of the Town’s portion, Dominion will be taking down a license option of 4.2 MGD of capacity with the intent of purchasing this licensed capacity after five years, leaving the Town with 8.8 MGD of capacity in the system.
• Ten days after the effective date of the agreement, Dominion will make an up-front principal payment in the amount of $191,821 as well as an interest payment in the amount of $41,198. Every quarter thereafter for the next five years, Dominion shall make a purchase option payment in the amount of $228,899. The final payment will be on June 30, 2022. A final payment or credit will occur at the end of the five-year period to reconcile the construction costs associated with the Canyons infrastructure.
• The deal will provide the Town with potential additional capacity in the Canyons infrastructure when Dominion is not using it, which will be most of the time. This will allow us to move additional water to the Town if necessary during the five-year period.
• With an interest rate of 3.55%, the Town will earn interest on the financed funds at approximately 7.9 times the current rate (the Town’s current rate of return on funds is approximately 0.45%). The total interest earned will be approximately $404,000 based on a quarterly payment schedule (see Attachment C).
• Any default by Dominion will result in the Town keeping all license option and license payments to date as well as getting full title to the additional infrastructure license capacity. The Town and Dominion have an executed license agreement for reservation of capacity in the Town’s Outter Marker Road to the Ray Waterman Treatment Plant pipeline. Attachment D provides a summary of the current and planned partnerships with Dominion and the real benefits to Castle Rock Water’s customers in terms of additional revenue and shared infrastructure costs. It is important to note that without Dominion, Castle Rock would have to carry the infrastructure costs for much of this regional infrastructure alone.
History of Past Town Council, Boards & Commissions, or Other Discussions
On June 17, 2014, Town Council approved the execution of the Western Pipeline Purchase Agreement by the South Metro WISE Authority.
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 which included design of the Ridgegate Infrastructure.
On October 22, 2014, staff provided the Castle Rock Water Commission with an update of the Alternate Source of Supply Projects which included an update regarding the Ridgegate infrastructure.
On November 18, 2014, Town Council approved Resolution 2014-92: Execution of the Ridgegate Line and Rueter-Hess WISE Infrastructure Design Intergovernmental Agreement
On February 13, 2015, Town Council approved the First Amendment to the IGA regarding the Ridgegate Line and Rueter-Hess WISE Infrastructure Design Intergovernmental Agreement dated November 19, 2014, which reduced Castle Rock’s cost by $169,580 due to the design contract being substantially less than originally estimated.
On January 5, 2016, staff provided Town Council an update regarding the Alternate Source of Supply Projects which included an update regarding the progress on the Ridgegate infrastructure design.
On April 19, 2016, Town Council approved the execution of an Intergovernmental Water Infrastructure Cost Sharing, Construction and Capacity Allocation Agreement between the Town of Castle Rock and Parker Water and Sanitation District for the Ridgegate Line portion of the WISE infrastructure.
On May 17, 2016, staff provided Town Council an update regarding the Alternate Source of Supply Projects which included an update regarding the progress of WISE core and local infrastructure progress.
Staff presented the Canyons Pipeline Capacity License Agreement to Castle Rock Water Commission on July 27, 2016. Castle Rock Water Commission unanimously recommended that Council approve the agreement.
On August 16, 2016, Town Council approved the Canyons Pipeline Capacity License Agreement with Dominion.
On June 6, 2017, Town Council approved the Intergovernmental Water Infrastructure Design, Construction Cost Sharing and Capacity Allocation Agreement with PWSD for the Canyons design-build contract.
Discussion
One of the key pieces of the Town’s long-term water supply strategy is the incorporation of new, renewable imported supplies. Water from the WISE project will help us meet this goal and partnerships with other providers helps to lessen the financial impact to our customers. In order to deliver imported supplies to the Town, pipelines and pump stations must be constructed. Some of this infrastructure includes that which was described in the Canyons Pipeline IGA with Parker Water and Sanitation District (PWSD). This infrastructure consists of a 36-inch, 3.4-mile pipeline and a pump station that will deliver water from PWSD’s water distribution system to the Town’s planned WISE local transmission line that is currently under design. The Town has entered into this IGA with PWSD and covers cost sharing for the design, construction and capacity allocation of the infrastructure. This work is being performed by the Reynolds, a subcontractor to Overland Contracting, Inc., under a design/build project delivery method.
Dominion Water and Sanitation District (Dominion), with whom the Town is in partnership on other WISE infrastructure (Western Pipeline, Infrastructure Capacity, Outter Marker Road License Agreement), has requested that the Town consider a License Agreement arrangement to fund Dominion’s share of the Canyons infrastructure. Basically, the Town will purchase Dominion’s capacity in this pipeline/pump station system and provide a license option back to Dominion over a five-year period. The benefits of the proposed License Agreement include additional funds from Dominion to help offset Castle Rock’s future capital costs, a slight reduction in future needed rate increases, access to additional pipeline capacity for the next five years, and strengthening of a partnership which has the potential to save the Castle Rock Water customers even more money going forward.
The Town’s initial estimated cost for participation in this IGA was $10.5 million. During the design of the project in mid-2016, PWSD was not able to come to an agreeable negotiated price with the Western Summit led design-build team and had to take the off-ramp. PWSD is now working with Reynolds to construct the pipeline and a 7.2 million gallon per day pump station (however, the pump station will not be initially required for delivery of WISE water to the Town). PWSD has indicated that this section of pipeline can be completed by the end of 2017. The Town’s total cost for participation in this infrastructure is up to $12.14 million. Final costs for this IGA with PWSD and the lease purchase agreement with Dominion will be adjusted based on the final construction price. A portion of this initial cost ($4.178 million) will be covered by Dominion Water and Sanitation District under a License Agreement.
The License Agreement with Dominion would be at an interest rate of at 3.55% which is the weighted average of our combined interest rates for all the Castle Rock Water outstanding debt, plus one-percent, for a term of five years. During this period, the Town would control Dominion’s capacity in the line until they have paid their portion of the full construction price plus interest back to the Town. Key terms of the License Agreement with Dominion were summarized in the Executive Summary.
There are several benefits to the Town purchasing the Canyons Infrastructure and entering into a license arrangement with Dominion:
1. By helping Dominion, this would provide the Town additional capacity in the Canyons infrastructure which would allow us to move additional water to the Town if necessary during the five year period of the license option.
2. With an interest rate of 3.55%, the Town would earn interest on the financed funds at around 7.9 times the current rate (the Town’s current rate of return on funds is less than 0.45%). The total interest earned would be approximately $404,000 based on a quarterly payment schedule (see Exhibit 1).
3. Dominion Water and Sanitation District does not need this water for several years. This business deal does not injure either party from a water usage standpoint.
4. The Town has the financial capabilities to purchase the additional capacity and provide a license option for the next five years.
5. Any default by Dominion would result in the Town keeping all license option and license payments to date as well as getting full ownership of the additional infrastructure capacity.
6. A review of the Town’s current financing indicates that there are no restrictions that would prevent the Town from doing this deal.
7. This agreement continues our partnership with Dominion on the infrastructure for the WISE project.
Budget Impact
The Canyons Pipeline IGA will impact the Town’s WISE Project budget. The IGA states that all costs are due within 10 days of the effective date. The initial payment that the Town will be making in support of this IGA’s responsibility is $12.14 million, however, Dominion will be covering approximately $4.178 million of this cost through a separate License Agreement with the Town.
The quarterly license option payments that Dominion is required to pay as part of the Capacity License Agreement will be made into account number 211-4375-393.70-00 (Water Resources Fund - Dominion Capital License Payments).
Recommendations
Staff and Castle Rock Water Commission recommend that the Water Pipeline Capacity License Agreement with Dominion (WISE Authority member) be approved.
Proposed Motion
“I move to approve the Resolution as introduced by title.”
Attachments
Attachment A: Resolution
Exhibit 1: Agreement
Attachment B: Location map
Attachment C: Amortization Schedule
Attachment D: Partnership Benefit Matrix