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  Agenda Item   27.    
City Council Meeting
Meeting Date: 11/15/2022  
FROM: Bill Gallardo

Subject:
Authorization to Purchase Common Stock Shares in California Domestic Water Company
RECOMMENDATION
Approve the Common Stock Purchase Agreement to purchase 112 shares of California Domestic Water Company (CDWC) Common Stock for $15,250 per share to increase the City's rights to access water and appropriate $1,708,000 from the Water Utility Fund (420) for the purchase of these shares.
BACKGROUND/DISCUSSION
The City of Brea (City) plans to purchase approximately 95% of its water, about 9,636 acre feet, from CDWC in FY 2022-23 and in the future. The City currently has rights to 4,864.92 acre feet of water per year, based on Common Stock shares and Preferred Stock shares owned in CDWC and based on the City’s own water rights.  Any water the City purchases from CDWC in excess of its rights (Excess Water) is at a higher cost. Additionally, the City purchases the remaining 5% of its water, about 500 acre feet, from Municipal Water District of Orange County (MWDOC). The cost of water per acre foot from these various sources for FY 2022-23 is as follows:
 
Description Cost per Acre Foot
FY 2022-23
City-owned water rights(1) $270
   
CDWC – Preferred Stock Water $270
CDWC – Common Stock Water $385
CDWC – Excess Water $1,132
   
MWDOC (effective 01-01-2023) $1,209

(1) The City leases its prescriptive pumping rights to CDWC for $1 each year in order for CDWC to pump and deliver the water to the City.

On September 16, 2022, the Board of Directors of CDWC authorized the issuance of 375 shares of Common Stock at a price of $15,250 to existing shareholders:  the City of Brea, the City of La Habra, and Suburban Water Systems based on their current respective ownership percentages.  Due to timing constraints, on or before October 31, 2022, the City Manager expressed to CDWC interest in acquiring additional Common Stock shares. Attached is a purchase agreement for City Council’s consideration of this acquisition. On September 30, 2022, staff received a proposed Common Stock Purchase Agreement to purchase one hundred twelve (112) shares of CDWC Common Stock at a price of $15,250 for a total purchase price of $1,708,000.

At this time, the request is for 112 shares.  Should the other CDWC shareholders not wish to purchase their entire proportional share, the City of Brea may have the opportunity to purchase additional shares.   If this opportunity arises, staff will bring this additional purchase to the City Council.  

The acquisition of additional CDWC Common Stock shares would give the City the right to purchase more water at the lower cost Common Stock Water Rate and lower the City’s annual water supply cost.  With this purchase, the number of Common Stock owned by the City will be 2,320.25 shares.  The Common Stock Water Rate of $385/AF as compared to the Excess Water Rate of $1,132/AF is a savings of $747/AF.  Based on the current entitlement rate of 1.45 acre feet of water per Common Stock share, the savings per Common Stock share purchased is $747 (adjusted for rounding).  The purchase of one hundred twelve (112) Common Stock shares results in a projected annual savings of $83,664 (112 X $747/Common Stock share). Based on the purchase price of $1,708,000 and the projected annual savings of $83,664, the return on investment is calculated to be 4.9% with a payback of 20.4 years. 

The cost of water from MWDOC is currently $1,143/AF and will be $1,209/AF, effective January 1, 2023. When compared to the cost of Excess Water or water purchased from MWDOC, the purchase of additional Common Stock shares is projected to result in a less expensive long-term water supply.  In addition to the immediate savings and the long-term reduction in water supply costs, CDWC has also identified the following benefits:
 
• The City also has the option to lease unused water entitlements from Common Stock shares, if any, to other shareholders.

• The issuance of Common Stock helps CDWC in generating capital without having to acquire debt and plan for the cost of debt service payments, which would be costs ultimately borne by the shareholders, and their rate payers.

• Less reliance on the more expensive water supply from MWDOC.
 
The City Attorney has reviewed and approved the Common Stock Purchase Agreement as to its terms. Therefore, staff recommends the City Council authorize the purchase of one hundred twelve (112) shares of Common Stock from CDWC at a price of $15,250 per share for a total of $1,708,0000 and execute the Common Stock Purchase Agreement as presented.
FISCAL IMPACT/SUMMARY
The Water Enterprise Fund has sufficient capital reserves to fund the purchase price.  The annual cost savings will offset future cost increases in the City’s water system operating costs, including the wholesale cost of water. There is no impact to the City’s General Fund.

The purchase of one hundred twelve (112) additional Common Stock shares in CDWC at $15,250 per share for a total cost of $1,708,000 will reduce the City’s cost of supply by increasing the City’s entitlement to lower the cost of water through CDWC and avoids the higher cost Excess Water and/or water from MWDOC. The purchase is projected to save the City approximately $83,664 annually based on the current cost of water from CDWC.
RESPECTFULLY SUBMITTED:
William Gallardo, City Manager
Prepared by: Faith Madrazo, Financial Services Manager, Revenue
Concurrence: Kristin Griffith, Administrative Services Director
 
Attachments
2022 Issuance of Common Stock to Shareholders
Common Stock Purchase Agreement

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