As will be explained below, there isn't enough money in the RCW plan to purchase the water companies. This plan is just a prop in RCW's bid to take control of the PSWID board. It is a way to mislead the public into believing that there is no cost to giving RCW control of our water future. Once in control, RCW will "discover" that Mr. Hardcastle isn't interested in selling PWCo and SWCo for less than they are worth. Then, Mr. Hardcastle will be blamed for ruining their plan and we will all be stuck with the bill. In addition, we get to wait another three years before any of this water we have now to actually come out of our faucets.

RCW plans to form a water district and have the water district buy PWCo and SWCo. To do that RCW plans to have the water district borrow $5,250,000. Combined with the $400,000 balance in the PSWID account, RCW's plan divides the money as follows:

In order to claim that purchasing the water companies will be "free" to rate payers, RCW makes several assumptions that are unreasonable:

1. The water companies can be purchased for a third less than their value was estimated at in 2003.
2. That the water district can borrow money at 4.1% and earn 5.5% on it
3. That the water district can operate the water companies for significantly less than Brooke does

In addition the RCW plan is increasing revenue by:

4. Raising the property tax on district property owners
5. Raising connection fees from $500 to $3500

There are additional problems in the spreadsheet:

6. The starting dates are wrong
7. Connection cost for the new deep well in Pine is too small
8. Spreadsheet errors

1. The water companies can be purchased for a third less than their value was estimated at in 2003.

The $3,025,000 needs to cover three things:

1. Breach of contract lawsuit/settlement with PWCo for K2
2. Two+ years of legal fees for the condemnation lawsuit
3. The actual cost of PWCo and SWCo determined by the jury

The K2 agreement is a legal contract that the PSWID is a party to. The RCW board will not be able to walk away from the K2 well agreement without any consequences. Given the animosity between PWCo and an RCW board, we believe that it is likely that PWCo will seek to recover its losses on the K2 project from PSWID. Estimating the cost of such a lawsuit is difficult, but we believe that it is reasonable to expect a cost of at least $100,000.

When Cave Creek condemned their water company, it would have taken 29 months from filing the lawsuit to the completion of the jury trial (they opted for arbitration and it only took them 24 months). Twenty nine months of legal fees and other costs could approach $300,000.

That leaves $2,650,000 for the purchase of the water companies.

The Economist.com valuation estimated the 2002 value of both water companies as being in the range of $3,000,000 to $4,300,000 (the report can be viewed in the Pine library). This valuation did not include the Magnolia pipeline since it was separate from PWCo at the time. The Economist.com report calculated the combined value using three different methods:

• Asset Valuation Method: $3,347,930
• Cash Flow Method: $3,032,930
• Subscriber Value Method: $4,354,500
• Average Value: $3,578,453

The Economist.com report indicated that the Cash Flow method may not be suitable in this case and that the Cash Flow method requires additional adjustment for assets which they did not do. We are not going to use the Cash Flow method in the further discussion.

We have taken the Economist.com Asset and Subscriber valuations and updated them with the numbers from the 2006 annual report filed with the ACC, to account for the passage of four years, and to account for the transfer of the Magnolia pipeline to PWCo. The updated values are (follow the links to see how the valuations were updated):

• Asset Valuation Method: $4,657,147
• Subscriber Value Method: $6,144,000
• Average Value: $5,400,573

Star Valley recently offered $1600 per connection to buy their water company. Using that number, the value of the PWCo and SWCo water companies would be $4,915,200.

None of these valuations include the 161 acre-feet allocation of Central Arizona Project water that belongs to PWCo. This represents the water that flows down Pine Creek. If the community ever wants to build a reservoir to store water in, this allocation will be required in order to fill it. We have not been able to determine an exact value for this, but we believe that it will increase the purchase costs by millions.

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2. That the water district can borrow money at 4.1% and earn 5.5% on it

While the RCW plan says that the money will be borrowed at 4.25%, they actually used 4.1% when calculating the numbers. The RCW plan holds most of the Capital Improvements and Repair and Replacement account money until towards the end of the five years. During that time, their plan claims that they can earn 5.5% on that money. We asked the RCW web site:

WFPS Question: What type of account are you planning to earn 5.5% interest from?
RCW Response: In talking with different financial advisors on the topic, we feel a conservative investment of reserve funds could provide a 5.5% return.  Until accounts are in place, and under the guidance of a professional advisor, we can only speculate.

As they state, they are speculating when they say in their plan that a 5.5% return will be achieved. The response implies that these funds will be placed in investments which contain risk to the principle. If there is no risk, then why would there need to be a professional advisor for the account? Poor selection of investments or market downturns could lead to a loss of those funds.

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3. That the water district can operate the water companies for significantly less than Brooke does

In 2006 the combined operating costs for PWCo and SWCo were $1,011,625. Removing the $48,883 in property taxes that the water district would not have to pay brings the costs down to $962,742. Of those costs, $326,715 (34%) are fixed costs for things like purchased water, electricity, chemicals, water testing, etc. that will be the same, no matter who runs the water system. The RCW plan shows an operating cost of $786,539, an overall decrease of 18.3%. Adjusting for the fixed costs, the RCW plan is projecting a reduction in variable operating costs of 27.7 %.

It is simply unreasonable to think that the water district will be able to run the water system at less cost than PWCo and SWCo. The reasons why are:

1. Water purchased from private wells is more expensive than water from district owned wells. The RCW plan will greatly increase the amount of water that is purchased from private wells. Currently, 41% of the water is sourced from private wells. Adding another 89 million gallons of private water will take that percentage to 72%. In addition, without the cap on prices that results from the rates set by the ACC, private well owners will demand higher prices for their water.
2. The water district will have to rent space for the new employees. There currently are no rental costs in the PWCo and SWCo operating costs.
3. With four water companies in the area, Brooke has economies of scale that the water district will not have. RCW has said that they are talking to several water system management companies. The idea being that one of these companies would be hired to run the water company. This would allow some of the economies of scale to be achieved, but the management company is going to want a guaranteed profit in doing that. At best this is a break even compared to the costs with PWCo and SWCo.

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4. Raising the property tax on district property owners

Over the last three years, PSWID has averaged $15,000 a year in expenses. This money is raised through property tax collections on properties within the district. RCW plans to increase these expenditures by 266% to $40,000 per year. Since the expenditures are more than are required for the boards operation, th extra $25,000 subsidizes the operation of the water company. (See item 16 of the RCW plan)

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5. Raising connection fees from $500 to $3500

The connection fee the PWCo charged before the moratorium took effect was $500 for a hook-up. The RCW plan increases that to $3500. (See item 55 and divide by the increase in customers in item 1 of the RCW plan)

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6. The starting dates are wrong

The RCW plan shows a starting date of the beginning of 2008. RCW avoids talking about when their plan is going to happen. We asked the RCW web site about the dates:

WFPS Question: The plan shows a start for 2008. Obviously it won't start then. What is your projected date for the acquisition of the the water companies to be complete?
RCW Response: Should the new candidates be elected.  The negotiations with PWCo and SWCo would begin immediately.  If the utility company has a favorable response to the negotiations, the lending institution and the attorney have estimated a closing in 3 to 6 months.

This is not a serious answer. No one in this community is going to believe that Mr. Hardcastle is going to just handover the water companies. With the animosity between RCW and PWCo and the under valued price that RCW is promoting, there will not be an agreement to sell reached outside of the courts. In a handout from the January 19, 2008 RCW meeting, it states:

"The District will need to make major investments in new water sources, underground delivery infrastructure, and enough funds to acquire the operating assets of Pine Water Co. and Strawberry Water Co., without paying anything for the monopoly license, for any goodwill (there is none), or for other "blue sky" the Company may claim during purchase negotiations or condemnation procedures."

Does that sound like the statement of a group that will be be able to negotiate a sale without having to resort to the condemnation process and the courts? Once it is in the courts, the jury will decide what the companies are worth.

With the time to setup the water district and file a condemnation lawsuit plus the 29 months for the condemnation process, RCW won't get the keys to the water companies for three years, it will be sometime in 2011.

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7. Connection costs for the new deep well in Pine are too small

In the RCW plan, it allocates $600,000 for drilling a new deep well in Pine and $100,000 for connecting the new well into the distribution system. The $100,000 is far less than is required for that connection. (See items 61 and 62 in RCW plan)

Tetra Tech did an estimate for running an 8 inch main from the Milk Ranch well to the 300,000 gallon storage tank that feeds the distribution system for Pine. The cost is $892,000. RCW disputes the need for this main, saying that the Milk Ranch well can be patched in to the existing distribution and just serve the southern and western portions of Pine.

When a new deep well is drilled, it will be in the general vicinity of the Milk Ranch well, based on potential areas identified by recent surveys. This well can't be limited to serving a portion of Pine. The water will need to be taken up to the main distribution point so that it can be sent to Strawberry and the entire Pine area. This means that the connection costs in nine years will be more than $892,000, not the $100,000 being stated.

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8. Spreadsheet errors

In looking at the plan that RCW provided to the public, it is full of basic spreadsheet errors. Numbers don't carry over to the next column properly, numbers are handled one way in one column and differently in another, and numbers are stated but different numbers are used in the formulas.

This is the public face that RCW provides to their plan and it is sloppy in its presentation. It indicates that they have not been careful in constructing their plan and makes one wonder how careful they would be in implementing it.

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