To: Honorable Mayor and Members of Town Council
From: Mark Marlowe, Utilities Director
Matt Benak, Water Resources Manager
Title
Resolution Approving the Town of Castle Rock / Dominion Water and Sanitation District Canyons Pipeline Capacity License Agreement
Body
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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 Capacity License Agreement with Dominion Water and Sanitation District (Dominion) to fund Dominion’s share of the Canyons Infrastructure. The construction of this infrastructure is being managed by Parker Water and Sanitation District (PWSD) and built by the Western Summit/Stantec design-build team. 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 Utilities 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 of Attachment B. Key terms of the final Capacity License Agreement with Dominion are below:
• Town will fully fund the pro rata shares of it’s 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 5 years, leaving the Town with 8.8 MGD of capacity in the system.
• Within 45 days of execution of the agreement, Dominion will make an up-front principal payment in the amount of $234,468 as well as an interest payment in the amount of $16,185. At the end of 2016, Dominion shall make another interest payment in the amount of $39,537 and at the end of the second quarter of the agreement period, Dominion will make a purchase option payment to the Town in the amount of $244,083. These payments will continue each quarter for the five-year period. 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 5-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 $482,000 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. Staff anticipates a similar license agreement with Dominion 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 Utilities 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 the Utilities Commission on July 27, 2016. The Utilities Commission unanimously recommended that Council approve the agreement.
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, 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 is entering 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 Western Summit/Stantec team 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), 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 estimated initial cost for participation in this IGA is $10.5 million. During September 2016, a guaranteed maximum price will be developed and finalized as part of the design component of the design/build contract. Final costs for the Canyons IGA with PWSD and the lease purchase agreement with Dominion will be adjudicated based on the guaranteed maximum final pricing from Western Summit/Stantec. Staff will report back to Council on final construction pricing. A portion of this initial cost ($4.69 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 $482,000 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 $10.5 million, however, Dominion will be covering approximately $4.69 million of this cost through a separate License Agreement with the Town. PWSD has mentioned that there is a possibility of phasing the costs if necessary. In September 2016, 60% design costs and a guaranteed maximum price (GMP) will be known and staff will report back to Council at that time on final costs. The 2016 WISE budget currently does not have adequate funding for this project with a balance of $9.414 million remaining. The capital reserve account in the Water Resources Enterprise does have adequate funds and has funds that have been reserved specifically for WISE. A budget amendment of $1,085,100 will be needed to appropriate funds from capital reserves. Funding will come from WISE account 211-4375-443.77-72, Project Code WR WLI.
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 Utilities 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