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WD-8

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Application of CaliforniaAmerican Water Company (U210W) for a Certificate of Public Convenience and Necessity to Construct and Operate its Monterey Water Supply Project to Resolve the Long-Term Water Supply Deficit in its Monterey District and to Recover All Present And Future Costs in connection Therewith in Rates

Application No. 12-04-019 (Filed April 23, 2013)

DIRECT TESTIMONY OF ROBERT LARKINS

De LAY & LAREDO David C. Laredo, CSBN 66532 Heidi A. Quinn, CSBN 180880 Alex J. Lorca, CSBN 266444 606 Forest Avenue Pacific Grove, CA 93950-4221 Telephone: (831) 646-1502 Facsimile: (831) 646-0377 Email: dave@laredolaw.net heidi@laredolaw.net alex@laredolaw.net

Attorneys for MONTEREY PENINSULA WATER MANAGEMENT DISTRICT February 22, 2013

DIRECT TESTIMONY OF ROBERT LARKINS A.12-04-019 PAGE 1

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 I.

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

In the Matter of the Application of CaliforniaAmerican Water Company (U210W) for a Certificate of Public Convenience and Necessity to Construct and Operate its Monterey Water Supply Project to Resolve the Long-Term Water Supply Deficit in its Monterey District and to Recover All Present And Future Costs in connection Therewith in Rates

Application No. 12-04-019 (Filed April 23, 2013)

DIRECT TESTIMONY OF ROBERT LARKINS

INTRODUCTION

Q1. What is your name and address? A1. My name is Robert Larkins. My business address is One Embarcadero Center, Suite 650, San Francisco, CA 94111.

Q2. By whom are you employed and in what capacity? A2. I am employed by Raymond James & Associates, Inc., as a Managing Director and Manager of the Western Region for Public Finance. I am the lead representative for my firm in our role as Consultant to the Monterey Peninsula Water Management District.

Q3. Can you briefly describe your educational background? A3. I graduated with a degree in Political Science, Magna cum Laude and Phi Beta Kappa from Stanford University in 1984.

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Q4. Do you have professional experience with large scale capital projects, such as water supply projects? A4. Yes. I have spent my entire career (1985 to present) in California municipal finance. I have completed over $50 billion of bond financings. Specific water-related experience includes financings for the Lopez Dam in San Luis Obispo County, the Los Vaqueros Dam expansion for Contra Costa Water Authority, and the City of San Diego’s inaugural wastewater system financing in 1993. I have done work for East Bay MUD, Marin Municipal Water District, and Sacramento Regional Sanitation District. I have also done bond underwriting work for Monterey County and the City of Carmel-by-the- Sea.

Q5. What is the purpose of this direct testimony? A5. I am here to testify to the benefits to ratepayers in the Cal-Am service territory from the Public Financing Proposal submitted by the Monterey Peninsula Water Management District.

Q6. Are there financing tools available from the public sector that can reduce the cost of the proposed project to ratepayers? A6. Yes, there are a number of tools that can benefit ratepayers. Any tool that will provide longer term financing at a lower cost of capital than Cal-Am’s regulated return on equity and allowed corporate debt cost will benefit ratepayers, as will tools that reduce or replace Cal-Am’s proposed “surcharge 2” which, despite not bearing a gross-up for debt cost or equity return in the revenue requirement, still must be paid by ratepayers, and still impacts the revenues required from consumers in the near term. a) State Revolving Fund loans. Certainly, if Cal-Am can secure SRF financing, this is the best form of financing from a rate payer perspective. Currently bearing a cost of 1.7% for 20 years, this is very cheap money, and as is the generally the case in any project financing of this nature, the better one can
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match the term of the debt to the useful life of the asset the better it is for ratepayers—both today and in the future. However, it is not clear to me that the Company will qualify, as the existing programs are set up for public agencies and native American organizations, not private investor owned utilities. Further, because in California the SRF programs are, in part, funded with taxexempt bonds, it is not clear that a large loan to Cal-Am would not run afoul of existing tax covenants made by the State to its bondholders, and we also have concerns that the SRF program administrators would make such a large loan to an unrated entity like Cal-Am. I think all parties would be well served before going too far down this road, by requiring the Company to provide written documentation from the relevant agencies at the State that demonstrate it not only is an eligible borrower, but that the targeted SRF loan programs can, in fact, provide the magnitude of contribution being sought. At least one Cal-Am case assumes $86.1 million of SRF debt—that is an enormous input to the model, which, if not viable, has significant impacts for ratepayers. b) Securitization. From a cost perspective, the second best tool for lowering the burden of this project on ratepayers would be a tax-exempt securitization, which has been described in the District’s February 5 proposal. In this

approach, the District would set up a non-recourse, special purpose entity to issue long term tax-exempt financing secured by a Commission- ordered, CalAm collected surcharge that would be sufficient to amortize the debt. Think of securitization as an enhanced “revenue bond.” While local ratepayers would be paying the surcharge (much like conventional water revenue bonds), the legal architecture of the securitization results in the debt being neither an obligation of the District nor Cal-Am, and the rating agencies and capital markets look solely to the integrity of the Commission-ordered, nonbypassable user fee. Properly structured, we anticipate a securitization would
DIRECT TESTIMONY OF ROBERT LARKINS A.12-04-019 PAGE 4

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enjoy very strong ratings, most likely AA or better. In the current market, a 30 year AA tax exempt securitization as described above, and subject to the Alternative Minimum Tax (“AMT”) because Cal-Am’s use of the funds is for “exempt facilities” under the federal tax code, would likely clear the market at 3.6%. Though the rate is higher than the SRF loan, the 30 year term is beneficial to ratepayers by reducing the annual revenue requirement. c) Use of tax-exempt debt by Cal-Am for its debt component. Cal-Am has, on prior occasions, accessed the tax-exempt debt market through the California Pollution Control Financing Authority (CPCFA). This requires obtaining socalled “private activity bond allocation” through the California Debt Limit Allocation Committee (CDLAC). We estimate this debt clears the market at 4.80%. d) Public Agency certificates of participation (“COPs”). As outlined in

MPWMD’s memo (Exhibit WD-1 of Mr. Stoldt’s testimony), a public financing issued by MPWMD (as certificates of participation) backed by the District’s Net Revenues, is another tool for reducing the burden on ratepayers. The revenues that would support this borrowing would include a water-use surcharge collected on the Cal-Am bill, plus the District’s existing Water Supply Charge, certain permit fees, interest earnings, and amounts in a District Rate Stabilization Fund. As is typical in California water revenue bond issues, the District would covenant to maintain Net Revenues in an amount equal to 1.25x annual debt service, and the District would covenant to enact the requisite Prop 218 proceedings to maintain the coverage requirement. We believe this structure would achieve ratings in the “A” category, and a 30 year financing, subject to the AMT would clear the market at 4.0%.

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II.

PUBLIC CONTRIBUTION OF FUNDS

Q7. How would a public contribution of funds work? A7. The Securitization and COPs structures discussed above are the best vehicles for a public contribution. A public contribution of funds would reduce the amount of the project that Cal-Am would have to finance with internal resources or SRF loans. Because the portion financed with a public contribution would not be included in the ratebase, the revenue requirement paid by ratepayers for the pretax equity and debt returns on that portion is replaced by the lower cost of public debt. The remaining portion would be financed by Cal-Am in a traditional 47% debt/53% equity manner using resources available to the company, with no impact to its debt-to-equity ratios for credit analysis purposes.

Q8. What are the potential financial benefits to ratepayers of a public contribution? A8. We have modeled a wide range of scenarios. At one end of the spectrum, the “100 Cal Am Equity & Corporate Debt” case below, there is no public contribution, and the project is financed with 53% Cal-Am equity and 47% Cal-Am taxable corporate debt. The Gross revenue requirement for this scenario through 2056, is $1.971 billion. Using a 6% discount rate, the present value is $580 million. At the other end of the spectrum, the “Maximum Public Contribution” case below, the capital structure is 53% Cal-Am equity, 47% SRF debt at 2% with a public contribution financed with $100 million of tax-exempt (AMT) AA-rated securitization at 3.60%. This approach has a gross revenue requirement of $1.959 billion, or $526 million present value, at 6%.

// //

DIRECT TESTIMONY OF ROBERT LARKINS A.12-04-019 PAGE 6

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Equity Cal-AM Corporate Debt SRF Securitization Gross Revenue Requirement Present Value at 6%

100% Cal-AM Equity & Corporate Debt $ (mm) 98.4 % 53.0 Cal-AM Equity and SRF Debt $ (mm) 97.2 % 53.0 Maximum Public Contribution $ (mm) 40.1 % 53.0

87.2 0.0 0.0

47.0 0.0 0.0

0.0 86.1 0.0

0.0 47.0 0.0

0.0 35.5 100.0

0.0 47.0 (Contribution)

1,971.3

2,021.3

1,958.8

580.2

568.6

526.4

Q9. What modeling methodology did you use to perform your analysis? A9. The common model agreed to by the parties in A.12-04-019 distributed January 3, 2013 and as revised in the Supplemental Testimony Errata of Jeffrey Linam filed February 15, 2013.

Q10. Describe your interest rate assumptions for the cost of debt in your analysis. A10. We have used the following assumptions based on the views of Raymond James & Associates of the marketplace as of February 2013: • • • • • Cal-Am taxable debt: 5% Cal-Am CPCFA tax-exempt, AMT: 4.80% Tax-exempt securitization (conservative AA rating), AMT: 3.60% MPWMD public contribution, A-rated, AMT: 4% SRF debt (20 year): 2%

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Q11. What discount rate did you use? A11. We have used a discount rate of 6%.

Q12. Why is that discount rate preferable to the Cal-Am assumption in the common model? A12. Cal-Am’s 12% discount rate in the common financial model released January 3, 2013 is simply indefensible. Discount rates are generally supposed to be reflective of the obligor’s opportunity cost. In fact, in more normal interest rate environments, we would use our client’s pooled investment rate for discounting purposes. In other words, a rate at which the borrower could invest idle funds. It’s a bit trickier in this rate environment that reflects the Fed’s near-zero interest rate policies. For example, LAIF, the Local Agency

Investment Fund managed by the State Treasurer for idle local cash is yielding 30 basis points, or .30%. We note that the Department of Water Resources generally uses a

discount rate of 6%for project analysis. See also the supplemental testimony of Mr. Stoldt on this topic.

Q13. What if SRF is used for Cal-Am’s debt? How does this affect your analysis? A13. As discussed above, SRF debt would be very beneficial to ratepayers. For example, in the case we analyzed (9.6MGD/High End Capital Cost, excluding Cal-Am only facilities, with a surcharge) replacing $87 million of Cal-Am corporate debt at an assumed cost of 5%, with a like amount of SRF debt at 2%, reduces the present value of the revenue requirement by $11.6 million, using a 6% discount rate.

Q14. Could interest rates rise or the relationship between taxable and tax-exempt interest rates change by the time the debt is issued? If so, how might this affect your analysis? A14. Yes. Interest rates remain near historic lows. The 10-year Treasury bond is currently hovering near 2%. Before the Lehman Brothers bankruptcy in September 2008, the 10year was at 3.97%. Traditionally, as interest rates decline, the relationship between taxable
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and tax-exempts compresses. Before the financial crisis of 2008-09, long-term municipal debt (“munis”) generally averaged 85% of taxable debt. Hence, if 30 year Treasuries were at 6%, a high grade muni would be at roughly 5%. One consequence of the crash was that investors realized that munis lack the liquidity characteristics of Treasuries. As a result, for a few years now, muni rates, despite their tax-exemption, have been above Treasury rates. We strongly recommend that the final decision on the precise capital structure be determined at a date much closer to when the project is ready to be financed. We would recommend evaluating market conditions and relative costs six months before permanent financing, as the financing can easily be assembled in 4-5 months of time.

100% Cal-Am Equity & Debt Financing* GrossRevenue Requirement Present Value at 6% $2.118.7bb $623.4mm

Cal-Am

Equity

and

SRF Debt Financing*

$2.021.3bb $577.1mm

*Assumes Cal-Am corporate debt at Treasury+300bps = 9%; SRF debt at 4%.

Q15. What is the impact of the proposed Surcharge 2 on your analysis? A15. The surcharge reduces the need for higher cost Cal-Am equity and debt, but the surcharge isn’t “free.” Because we are talking about financing a large project with upfront costs, a surcharge that comes in over time doesn’t provide enough cash to build the project—unless the surcharge is monetized through a borrowing, such as the securitization discussed above. Otherwise, to make a difference, the surcharge needs to be large. For example, in the case we analyzed, Cal-Am’s model envisions surcharge revenues of $103 million in years 2014 to 2017. Those charges will fall directly on ratepayers. Our perspective is that you need to look not only at the total revenue requirement over time, and the NPV of that revenue requirement, but also the annual burden on ratepayers, which is why we have added to our
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modeling output a summary of rate payer impact over 5 and 10 year horizons. As shown below, and detailed in Exhibit WD-3, we compared the “100% Cal Am Equity & Debt” case discussed in Question 8 using the surcharge versus no surcharge. The total Revenue Requirement with the surcharge is $1.971 billion vs. $2.235 billion with no surcharge. Using a 6% discount rate, the present value of that case is $580 million with a surcharge compared to $640.5 million without it, or a benefit to ratepayers of $60 million from the surcharge. 100%Cal-Am Equity & Debt Financing 100%Cal-Am Equity & Debt Financing

with surcharge GrossRevenue Requirement Present Value at 6% $1.971 billion $580.2 million

with no surcharge

$2.235 billion $640.5 million

Q16. Were there concerns, corrections, or modifications you had to make to the model? A16. Upon our initial review of the model in mid January, we found several illogical outcomes, such as a higher revenue requirement resulting from more SRF debt, which is counterintuitive. The District conveyed some of our findings to the Company, who has made a number of revisions included in Mr. Linam’s February 15, 2013 Errata filing. We also point out that the model assumes a large financing in 2037, and our understanding of the corporate debt mechanics are a continuous rollover of intercompany debt, rather than a discrete 30 year financing with a fixed amortization, as would be the case with a securitization or MPWMD financing. In the public contribution scenarios, there is no rollover or refinancing risk.

Q17. When do you assume the project financing occurs for the results you modeled? A17. We have used the agreed upon model, which assumes financing takes place in March 2016.
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Q18. Describe the security for repayment and expected credit rating if District funding were obtained for a public contribution of funds to the project. A18. We refer to the District’s February 4 proposal letter to Cal-Am (Exhibit WD-1) and answers provided above. We expected a securitization would be rated AA or better, and that the District’s COP structure would be rate in the single A category.

Q19. Can private activity certificates of participation be sold by District and proceeds delivered to investor-owned utility without an ownership stake in facility or water produced? A19. We refer to the legal memorandum prepared by the District’s finance counsel, Sidley Austin attached as Exhibit WD-4.

Q20. What is the “public purpose” such that a contribution is not a gift of public funds? A20. We refer to Exhibit WD-4.

Q21. Does District have debt capacity sufficient to provide a “public contribution”? A21. Yes, using a combination of a water-use surcharge collected on the Cal-Am bill, plus the District’s existing Water Supply Charge, certain permit fees, interest earnings, and amounts in a District Rate Stabilization Fund, the District could raise up to $100mm. This amount was shown in the proposal included as Exhibit WD-1 of Mr. Stoldt’s testimony, which we have reviewed.

Q22. Is sufficient private activity volume cap likely to be available through CDLAC? How does that process work? Will it impact the Cal-Am schedule? A22. CDLAC allocates the State’s private activity volume cap on a calendar year basis. They have a very transparent application process, and they have regularly schedule public meetings at which the Committee decides on pending applications. In 2013, the State’s allotted $3.614 billion of private activity bond capacity, which is annually adjusted for
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population and inflation. In 2012, the State reserved $2 billion for housing related projects, but had $1.53 billion unreserved. The Poseidon desalinization project for the San Diego County Water Authority used $530 million of allocation for its non-pipeline projects. We expect no adverse impact on the Cal-Am schedule.

Q23. Would there be any adverse effect on other (non-Monterey area) Cal-Am ratepayers? A23. No. All financings we have modeled assume that only ratepayers in the Cal-am service area would be paying for the project and the Cal-Am debt-to-equity ratio state-wide would be unaffected.

Q24. Would there be any requirements on Cal-Am’s systems or day-to-day operations? A24. We don’t believe there would be any material impact on Cal-Am’s systems or day-to-day operations from any of the public contribution scenarios discussed. While a securitization would require Cal-Am to segregate the line-item surcharge and remit to a bank or servicing agent daily as received, we don’t view that as a major intrusion on their business.

Q25. Would the public contribution result in the need for a Cal-Am-specific credit rating? A25. No.

Q26. Is there any reason to expect a delay in project schedule due to financing with a public contribution? A26. No.

Q27. Would the use of a surcharge on the Cal-Am bill cause the public debt to be booked as a debt by the investor-owned utility? A27. I am not an accountant, and I am not qualified to opine on that. However, I can tell you that if the public contribution is in the form of a securitization, investors would know that the
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debt is absolutely non-recourse to the Company. And if MPWMD were the issuer of COPs as previously discussed, then I can say with certainly that the Company would not have to book it as debt.

Q28. Is there an advantage in the current marketplace to obtain tax-exempt debt? A28. I believe we have addressed this question extensively above. Tax-exempt debt is almost always cheaper than comparably rated taxable corporate debt.

Q29. Does the advantage hold if Cal-Am can obtain SRF loans? A29. The advantage is amplified by SRF loans, because the loans are subsidized.

Q30. How would a Cal-Am tax-exempt issuance be executed? A30. As discussed above, Cal-Am could access the tax-exempt market through the CPCFA, assuming the project meets the requisite “pollution control” criteria. The company would need to apply for private activity allocation through CDLAC (which is true for all of the tax-exempt options), and then make an application to the CPCFA, which normally takes 23months.

Q31. Does this conclude your testimony? A31.Yes it does. Thank you very much. Exhibits to Robert Larkins testimony:

22 23 24 25 26 27 28

WD-3 MPWMD High End Cap Scenario and Water Supply Scenarios WD-4 Eric Tashman Memorandum

U:\GENERAL (NEW)\MPWMD - Main\PUC - A.12-04-019 (MRY Water Supply Project)\Testimony\Robert Larkins\Direct Testimony of Robert Larkins.docx

DIRECT TESTIMONY OF ROBERT LARKINS A.12-04-019 PAGE 13

EXHIBIT WD-3

Exhibit WD‐3 Testimony of Robert Larkins Monterey Water Supply Project (9.6 MGD High End Capital Scenario with Surcharge): $289.2MM Project Cost
Summary of Results Description A 100% Cal‐Am Equity  and Corporate Debt B C 100% of debt is issued  100% of debt is SRF  through CPCFA as tax‐ loan exempt AMT Debt D 100MM of debt is tax‐ exempt securitization;  remainder of debt is SRF E 100MM of debt is  MPWMD tax‐exempt  debt; remainder of  debt is SRF

Capital Structure (%) CAW Equity 53.0% CAW Corporate Taxable Debt 47.0% Company  CPCFA tax‐exempt, AMT 0.0% Tax‐Exempt Securitization contribution 0.0% MPWMD public contribution 0.0% SRF Debt 0.0% Total 100.00% Capital Structure at YE 2017  ($MM) Surcharge Funded Costs 102.7 CAW Equity 98.4 CAW Corporate Taxable Debt 87.2 Company  CPCFA tax‐exempt, AMT 0.0 Tax‐Exempt Securitization contribution 0.0 MPWMD public contribution 0.0 SRF Debt 0.0 Summary of Results (Through 2056) Total cash flow from customers ($MM) 1,971.3 NPV cost at 6% ($MM) 580.2 Summary of Results ‐ Near Term Customer Impact (5 Years) Total cash flow from customers ($MM) 143.6 NPV cost at 6% ($MM) 118.6 Summary of Results ‐ Intermediate Term Customer Impact (10 Years) Total cash flow from customers ($MM) 322.2 NPV cost at 6% ($MM) 230.9

53.0% 0.0% 47.0% 0.0% 0.0% 0.0% 100.00% 102.7 98.3 0.0 87.2 0.0 0.0 0.0 1,964.0 578.0 143.4 118.4 321.0 230.2

53.0% 0.0% 0.0% 0.0% 0.0% 47.0% 100.00% 102.7 97.2 0.0 0.0 0.0 0.0 86.1 2,021.3 568.6 139.1 115.2 298.8 215.6

22.8% 0.0% 0.0% 57.0% 0.0% 20.1% 100.00% 102.5 40.1 0.0 0.0 100.0 0.0 35.3 1,958.8 526.4 134.5 111.9 260.1 190.7

22.8% 0.0% 0.0% 0.0% 57.0% 20.1% 100.00% 102.5 40.1 0.0 0.0 0.0 100.0 35.3 1,967.0 529.6 135.1 112.3 261.9 191.9

General Interest Cost Assumptions for each scenario: Cost of corporate equity: 9.99% Company corporate taxable debt:  5% (T+200bps) Company CPCFA tax‐exempt, AMT:  4.80% (Poseidon) Tax‐exempt securitization, AMT:  3.60% (high grade Cal water revenue bond+40bps for AMT) MPWMD public contribution, A‐rated, AMT:  4% SRF debt (20 year): 2% Total Project Cost Assumptions: Plant size (MGD) Capital Scenario Include CAW‐Only Facilities? Surcharge? Total Project Cost Summary ($MM) Desal Plant CAW‐Only Facilities AFUDC Total Project Cost

9.6 High End No Yes

271.30 0.00 21.11 292.41

271.30 0.00 20.85 292.15

271.30 0.00 17.92 289.22

271.30 0.00 14.66 285.96

271.30 0.00 14.66 285.96

Prepared by Raymond James

2/19/2013

Exhibit WD‐3 Testimony of Robert Larkins Monterey Water Supply Project (9.6 MGD High End Capital Scenario  Comparison of Surcharge Versus None): $289.2MM Project Cost
Summary of Results Description A 100% Cal‐Am Equity  and Corporate Debt ‐  Surcharge F 100% Cal‐Am Equity  and Corporate Debt ‐  No Surcharge 53.0% 47.0% 0.0% 0.0% 0.0% 0.0% 100.00% 0.0 163.0 144.5 0.0 0.0 0.0 0.0 2,235.1 640.5 60.8 45.8 322.8 210.9

Capital Structure (%) CAW Equity 53.0% CAW Corporate Taxable Debt 47.0% Company  CPCFA tax‐exempt, AMT 0.0% Tax‐Exempt Securitization contribution 0.0% MPWMD public contribution 0.0% SRF Debt 0.0% Total 100.00% Capital Structure at YE 2017  ($MM) Surcharge Funded Costs 102.7 CAW Equity 98.4 87.2 CAW Corporate Taxable Debt Company  CPCFA tax‐exempt, AMT 0.0 Tax‐Exempt Securitization contribution 0.0 MPWMD public contribution 0.0 SRF Debt 0.0 Summary of Results (Through 2056) Total cash flow from customers ($MM) 1,971.3 NPV cost at 6% ($MM) 580.2 Summary of Results ‐ Near Term Customer Impact (5 Years) Total cash flow from customers ($MM) 143.6 NPV cost at 6% ($MM) 118.6 Summary of Results ‐ Intermediate Term Customer Impact (10 Years) Total cash flow from customers ($MM) 322.2 NPV cost at 6% ($MM) 230.9

General Interest Cost Assumptions for each scenario: Cost of corporate equity: 9.99% Company corporate taxable debt:  5% (T+200bps) Company CPCFA tax‐exempt, AMT:  4.80% (Poseidon) Tax‐exempt securitization, AMT:  3.60% (high grade Cal water revenue bond+40bps for AMT) MPWMD public contribution, A‐rated, AMT:  4% SRF debt (20 year): 2% Total Project Cost Assumptions: Plant size (MGD) Capital Scenario Include CAW‐Only Facilities? Surcharge? Total Project Cost Summary ($MM) Desal Plant CAW‐Only Facilities AFUDC Total Project Cost

9.6 High End No Yes

9.6 High End No No

271.30 0.00 21.11 292.41

271.30 0.00 25.70 297.00

Prepared by Raymond James

2/19/2013

Monterey Water Supply Project (A)
Plant Size (MGD) Capital Scenario 9.6 High End 90.0 9.99% 5.00% 53.00% 47.00% 7.64% 50.0 Other Debt Rates Short Term Debt Rate Short Term Debt Cap ($MM) SRF Debt Rate SRF Term (yrs) SRF Assets Exempt from Prop Tax? 1.00% $20.0 2.00% 20 Yes 40.0 30.0 20.0 10.0 (%) $mm (as of 12/31/17) 53.0% $98.38 47.0% $87.24 0.0% $0.00 100.0% $185.61 0.0 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 Public Agency Contribution Tranche 3 Public Agency Contribution Tranche 1 CAW Revenue Requirement Public Agency Contribution Tranche 2 SRF Loan Repayment Surcharge 2 Tranche 3 Jan‐17 $0.0 0.0% 20 80.0 70.0 60.0 Cost of Capital

Cash Flows from Consumers ($MM)
Total cash flows from consumers NPV at 12.1% of cash flows through 2056 NPV at 6.0% of cash flows through 2056 $1,971.32 $275.04 $580.17

Financing Assumptions
Cost of Capital Cost of Equity Cost of Debt Equity % Debt %

1 ‐ Standard CAW CAW Capital Structure CAW Equity CAW Debt SRF Debt Total

Surcharge & Contribution Assumptions
Utilize a Surcharge? Amount of Surcharge ($MM) Tranche 1 Jan‐17 $0.0 0.0% 30 Yes $102.97 Tranche 2 Jan‐17 $0.0 0.0% 20

Contribution Date (End of Month) Contribution Amount ($MM) Financing Rate Financing Term

Prepared by Raymond James

2/19/2013

Monterey Water Supply Project (B)
Plant Size (MGD) Capital Scenario 9.6 High End 90.0 9.99% 4.80% 53.00% 47.00% 7.55% 50.0 Other Debt Rates Short Term Debt Rate Short Term Debt Cap ($MM) SRF Debt Rate SRF Term (yrs) SRF Assets Exempt from Prop Tax? 1.00% $20.0 2.00% 20 Yes 40.0 30.0 20.0 10.0 (%) $mm (as of 12/31/17) 53.0% $98.29 47.0% $87.17 0.0% $0.00 100.0% $185.46 0.0 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 Public Agency Contribution Tranche 3 Public Agency Contribution Tranche 1 CAW Revenue Requirement Public Agency Contribution Tranche 2 SRF Loan Repayment Surcharge 2 Tranche 3 Jan‐17 $0.0 0.0% 20 80.0 70.0 60.0 Cost of Capital

Cash Flows from Consumers ($MM)
Total cash flows from consumers NPV at 12.1% of cash flows through 2056 NPV at 6.0% of cash flows through 2056 $1,964.00 $274.11 $578.04

Financing Assumptions
Cost of Capital Cost of Equity Cost of Debt Equity % Debt %

1 ‐ Standard CAW CAW Capital Structure CAW Equity CAW Debt SRF Debt Total

Surcharge & Contribution Assumptions
Utilize a Surcharge? Amount of Surcharge ($MM) Tranche 1 Jan‐17 $0.0 0.0% 30 Yes $102.97 Tranche 2 Jan‐17 $0.0 0.0% 20

Contribution Date (End of Month) Contribution Amount ($MM) Financing Rate Financing Term

Prepared by Raymond James

2/19/2013

Monterey Water Supply Project (C)
Plant Size (MGD) Capital Scenario 9.6 High End 90.0 9.99% 4.80% 53.00% 47.00% 7.55% 50.0 Other Debt Rates Short Term Debt Rate Short Term Debt Cap ($MM) SRF Debt Rate SRF Term (yrs) SRF Assets Exempt from Prop Tax? 1.00% $20.0 2.00% 20 Yes 40.0 30.0 20.0 10.0 (%) $mm (as of 12/31/17) 53.0% $97.15 0.0% $0.25 47.0% $85.90 100.0% $183.30 0.0 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 Public Agency Contribution Tranche 3 Public Agency Contribution Tranche 1 CAW Revenue Requirement Public Agency Contribution Tranche 2 SRF Loan Repayment Surcharge 2 Tranche 3 Jan‐17 $0.0 0.0% 20 80.0 70.0 60.0 Cost of Capital

Cash Flows from Consumers ($MM)
Total cash flows from consumers NPV at 12.1% of cash flows through 2056 NPV at 6.0% of cash flows through 2056 $2,021.29 $262.51 $568.57

Financing Assumptions
Cost of Capital Cost of Equity Cost of Debt Equity % Debt %

2 ‐ CAW Equity / SRF Debt CAW Capital Structure CAW Equity CAW Debt SRF Debt Total

Surcharge & Contribution Assumptions
Utilize a Surcharge? Amount of Surcharge ($MM) Tranche 1 Jan‐17 $0.0 0.0% 30 Yes $102.97 Tranche 2 Jan‐17 $0.0 0.0% 20

Contribution Date (End of Month) Contribution Amount ($MM) Financing Rate Financing Term

Prepared by Raymond James

2/19/2013

Monterey Water Supply Project (D)
Plant Size (MGD) Capital Scenario 9.6 High End 90.0 9.99% 4.80% 53.00% 47.00% 7.55% 50.0 Other Debt Rates Short Term Debt Rate Short Term Debt Cap ($MM) SRF Debt Rate SRF Term (yrs) SRF Assets Exempt from Prop Tax? 1.00% $20.0 2.00% 20 Yes 40.0 30.0 20.0 10.0 (%) $mm (as of 12/31/17) 53.0% $40.06 0.0% $0.22 47.0% $35.31 100.0% $75.59 0.0 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 Public Agency Contribution Tranche 3 Public Agency Contribution Tranche 1 CAW Revenue Requirement Public Agency Contribution Tranche 2 SRF Loan Repayment Surcharge 2 Tranche 3 Jan‐17 $0.0 0.0% 20 80.0 70.0 60.0 Cost of Capital

Cash Flows from Consumers ($MM)
Total cash flows from consumers NPV at 12.1% of cash flows through 2056 NPV at 6.0% of cash flows through 2056 $1,958.82 $237.52 $526.42

Financing Assumptions
Cost of Capital Cost of Equity Cost of Debt Equity % Debt %

2 ‐ CAW Equity / SRF Debt CAW Capital Structure CAW Equity CAW Debt SRF Debt Total

Surcharge & Contribution Assumptions
Utilize a Surcharge? Amount of Surcharge ($MM) Tranche 1 Jan‐17 $100.0 3.6% 30 Yes $102.97 Tranche 2 Jan‐17 $0.0 0.0% 20

Contribution Date (End of Month) Contribution Amount ($MM) Financing Rate Financing Term

Prepared by Raymond James

2/19/2013

Monterey Water Supply Project (E)
Plant Size (MGD) Capital Scenario 9.6 High End 90.0 9.99% 4.80% 53.00% 47.00% 7.55% 50.0 Other Debt Rates Short Term Debt Rate Short Term Debt Cap ($MM) SRF Debt Rate SRF Term (yrs) SRF Assets Exempt from Prop Tax? 1.00% $20.0 2.00% 20 Yes 40.0 30.0 20.0 10.0 (%) $mm (as of 12/31/17) 53.0% $40.06 0.0% $0.22 47.0% $35.31 100.0% $75.59 0.0 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 Public Agency Contribution Tranche 3 Public Agency Contribution Tranche 1 CAW Revenue Requirement Public Agency Contribution Tranche 2 SRF Loan Repayment Surcharge 2 Tranche 3 Jan‐17 $0.0 0.0% 20 80.0 70.0 60.0 Cost of Capital

Cash Flows from Consumers ($MM)
Total cash flows from consumers NPV at 12.1% of cash flows through 2056 NPV at 6.0% of cash flows through 2056 $1,967.02 $239.06 $529.56

Financing Assumptions
Cost of Capital Cost of Equity Cost of Debt Equity % Debt %

2 ‐ CAW Equity / SRF Debt CAW Capital Structure CAW Equity CAW Debt SRF Debt Total

Surcharge & Contribution Assumptions
Utilize a Surcharge? Amount of Surcharge ($MM) Tranche 1 Jan‐17 $100.0 4.0% 30 Yes $102.97 Tranche 2 Jan‐17 $0.0 0.0% 20

Contribution Date (End of Month) Contribution Amount ($MM) Financing Rate Financing Term

Prepared by Raymond James

2/19/2013

Monterey Water Supply Project (F)
Plant Size (MGD) Capital Scenario 9.6 High End 90.0 9.99% 5.00% 53.00% 47.00% 7.64% 50.0 Other Debt Rates Short Term Debt Rate Short Term Debt Cap ($MM) SRF Debt Rate SRF Term (yrs) SRF Assets Exempt from Prop Tax? 1.00% $20.0 2.00% 20 Yes 40.0 30.0 20.0 10.0 (%) $mm (as of 12/31/17) 53.0% $162.97 47.0% $144.52 0.0% $0.00 100.0% $307.50 0.0 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 Public Agency Contribution Tranche 3 Public Agency Contribution Tranche 1 CAW Revenue Requirement Public Agency Contribution Tranche 2 SRF Loan Repayment Surcharge 2 Tranche 3 Jan‐17 $0.0 0.0% 20 80.0 70.0 60.0 Cost of Capital

Cash Flows from Consumers ($MM)
Total cash flows from consumers NPV at 12.1% of cash flows through 2056 NPV at 6.0% of cash flows through 2056 $2,235.13 $275.22 $640.53

Financing Assumptions
Cost of Capital Cost of Equity Cost of Debt Equity % Debt %

1 ‐ Standard CAW CAW Capital Structure CAW Equity CAW Debt SRF Debt Total

Surcharge & Contribution Assumptions
Utilize a Surcharge? Amount of Surcharge ($MM) Tranche 1 Jan‐17 $0.0 0.0% 30 No $0.00 Tranche 2 Jan‐17 $0.0 0.0% 20

Contribution Date (End of Month) Contribution Amount ($MM) Financing Rate Financing Term

Prepared by Raymond James

2/19/2013

EXHIBIT WD-4

EXHIBIT WD-4 Testimony of Robert Larkins

EXHIBIT WD-4 Testimony of Robert Larkins

EXHIBIT WD-4 Testimony of Robert Larkins

EXHIBIT WD-4 Testimony of Robert Larkins