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Home My WebLink AboutRPT 1a WTR MAIN EXTEN 05-04-81DATE: April 27, 1981 TO: FROR: SUBJECT: HONORABLE MAYOR AND CITY COUNCIL DAN BLANK~SHIP, CITY ADMINISTRAg~R WATER ~IN EXTENSION AGREEM~Vl~S In acquiring the ~stin Water Works, we also agreed to assume its Water Main Extension Agreements. The Company agreed unaer Public Utilities Co~ission rules to pay back developers for the construction of mains in subdivisions or developments. This payback is at 22% of the water sales within that development for up to 20 years and any balance remaining is paid off in five equal annual installments thereafter. These agreements do not earn any interest, they simply pay back the actual amount paid originally by the developer. This memorandum is provided as background to keep you informed ano to lay the groundwork for considering any discount purchase proposals if we finu any interest on the part of agreement holders. No action is requirea by Council at this time. Attached is a memorandum I sent to the City Attorney which gives a certain ~eg~ee of information about the two types of agreements. Of the six Footage Allowance. Agreements ($177,534.73 of the $1,074,888.74 total or 16.5%), one of these six agreements has expired whida removes $25,140 from the water system's liability. Of the 118 regular agreements outstanding as of January t, 1981 ($897,353.95 of the $1,074,888.74 t~tal or 83.5%), $132,234.24 is being paid on April 30th from the 1980 calendar year water sales. This means that all of these agreements have been reduced from the $1,074,888.74 total to $917,514.50 in calenaar year 1980. Ed Wells (Battle Wells and Associates) our financial consultant has consistently reconmended that we attempt to cash out these agreements at a discounteo rate. We have developed a method of evaluating the presumed present cash value, which we have discounted in addition. We have contacte~ six of the larger regular agreements and are awaiting a response (see the attached letter). If any of them show interest, the specific offers will be submitted to the City Council for approval. If you have any questions, please give us a call. No specific action is called for at this time. ~espectfully submitted, D~q BLANK~I~SHIP, City Administrator DB:dmt DATE: March 20, 1981 Inter-Corn TO: J~.tES G. ROURKE, CITY AS~fORNEY FROM: DAN BLANKEINSHIP, CITY ADMINISTRATOR SUBJECT: WATER MAIN EXTENSION AGREEMENTS (T~W) ~he following information is provided ~n main extension agreements as background. 1. As of December 31, 1980. Balance of Refund Agreements Amount due for payment 4/30/81 Future obligation $1,074,888.74 132,234.24 $ 942,654.50 Includes: Regular agreements Footage allowance agreements $ 765,119.71 177,534.73 $ 942,654.50 2. Two categories of Agreements. Footage Allowance Agreements are six agreements which the company only refunds a portion when additional "connection units" are attached to the line. ~'ney only last for 10 years and may be a doubtful payout. Regular Agreements are the normal developer agreement which mst will require full payout in time. There are 118 outstanding as of January 1, 1981, of which 28 will be paid off this year (4-30-81). Ten more will be paid off in 1982 (4-30-82) with 80 more remaining longer. At the $132,234.24 rate, the agreements would be paid off in seven years Actually, the ~nount will decrease as agreements are paid off and the remaining agreements will have more paid on them due to increased revenue from rate increases (adjusted by changes in water useage.) The purpose of this me~randum is to explore the possibility of cashing out these agreements early at a discounted rate. This takes hard to come by funds in the early years but, at the right discount, would De a long range financial Doom and expedite the time when the system has adequate construction revenue. ~ne approach taken was to calculate the value of today's money in terms of future purchasing power. Thi~' was ODne in a rough manner by taking a 10%, 15% and 20% inflation factor. The 20% is too high and the actual rate will probably be between the 10% and 15% figure. Taking 10% as an example, one can calculate that the 1st year's money is worth a theoretical 100%, the second year's is worth 90%, the third 81%, etc. An agreement paid off in one year is unlikely to have a discount, but in t~ years the effective value is one-half of 100% plus 90% (95% average), and in three years the effective value is one-third of 100% plus 90% . plus 81% (90.3% average). The following table reveals the trend. Payoff 10% 15% 20% 1 yr. 100% 100% 100% 2" 95.0 92.5 90.0 3" 90.3 85.75 81.33 4" 85.98 79.67 73.80 5" 80.9 74.17 67.23 6" 78.09 69.21 61.49 7" 74.53 64.69 ' 56.45 8" 71.19 60.63 9" 68.07 56.92 10" 65.14 53.54 ' Our 'assumptions are that anyone who will be paid off in one or two years will be insistent on full value or only a slight discount. The larger the payoff period, the more willing they should be to compromise at a lesser percentage. At 15% inflation, their principal is only worth 75% in 5 years and about 50% in 10 years. If we pay that, we gain nothing. If we try to buy them at 40% of their adjusted value, we would Pay 30% (40% of 75%) of the balance due on five year agreements and 20% (40% of 50%) on the balance due on ten year agreements. If we must offer much over 50% of face value, then it is of marginal value to offer to pay them off. Our thought is to contact them by letter (see attached sample) and solicit their interest. Our questions are: 1. Does the letter sound all right? 2. Does an offer of 30%, 20%, and 10% of face value after the 4-30-81 payment seem reasonable to you for 5 year, 10 year and 15 to 20 years payouts? 3. Does starting with six to ten of the largest balance accounts seem a logical way to go? 4. Do we need Council approval before or after the offers, or can we simply inform tham of our intentions and self impossd limits? If we do not need Council approval, or get it at the start, then the letter will need a slight revision. 5. Do we need a waiver or cancellation of agreement form upon receipt of which we will pay the agreed upo~ sum? Your assistance will be appreciated. DB:drnt April 24, 1981 Village Homes Ref No.: 620545 Gentlemen: You are presently the holder of a Main Extension Agreement with the Tustin Water Works. As you may be aware, the City of Tustin has acquired the Tustin Water Works through a non-profit corporation and the system is now owned arm operated by the City. Tne City has assumed the obligation of honoring the present main extension agreements as part of the acquisition agreement. However, the City recognizes that those non-interest bearing agreements are not totally desirable to many holders in these periods of increasing inflation. 'llais may create an opportunity of mutual benefit for the City to reduce the outstanding liabilities of the system while providing you with i~meGiate cash. This, of course, would be at your option. In addition to your April 30, 1981 payment of $1,266.64, City Staff is prepar~ to reco]~nend to the City Qouncil an iranediate cash payout of $5,030.81 in consideration for your cancellation of the remaining future agreement malance of $33,538.71. Our calculations indicate your present agreement may otherwise take 17 years to payout as currently scheduled. We developed a projection of the present dollar value of your agreement Dy estimating the annual payment in accordance with the terms of your agreement assuming a reduced value of each subsequent annual payment aue to inflation. Our offer is calculated on less than the present dollar value which is essential in order to make the transaction desirable for the City. Please sign and return the enclosed copy of this letter to indicate YOur interest in this proposal. Thank you for your cooperation. Sincerely yours, DAN BLANFJt~SHIP, City A~iministrator RESPONSE Yes, we would definitely be interested in the above settlement payout. Please contact me to discuss it in detail. No, we prefer to be paid off over the years in accordance with our agree- ment. Other: (explain) Signature: -- Title: Date: Telephone: ( ) City Center 300 Centennial Way Tustin, California 92680 (714) 544-8890