Long-Term Financial Planning Plan of Finance 1 Debby Cherney, Deputy General Manager Charles Turner, Director of Finance

Agenda Long-Term Financial Planning –Strategic Planning Context Plan of Finance for 2015 –Debt Portfolio Optimization Project Planning Objectives and Measures Status Update Upcoming restructuring opportunities –Plan for future capital funding –Next steps 2

Long-Term Financial Planning: Strategic Planning Components 3 Long-Term Financial Plans Debt Management Operational Budgeting Capital Planning (Expansion & Replacements) Cost of Service Studies Rate Stability Strategic Planning Foundation Strategic Goal: Ensure financial stability and demonstrate responsible stewardship of public funds Strategic Plan: Financial Stability: Enhance and maintain the District’s strong financial position and credit quality by identifying and implementing specific opportunities to improve underlying financial metrics. Proportionate Cost of Service: Develop and implement needed modifications to the District’s fees, rates, and charges that ensure each customer class pays its proportionate fair share, while generating adequate revenues to meet District’s financial obligations. Infrastructure Replacement: Develop and execute a financial plan to fund future infrastructure replacements and refurbishments using reserves, financing, and rate revenue in a balanced manner that avoids rate spikes.

Long-Term Financial Planning: Strategic Plan Implementation 4 Long-Term Financial Plans Debt Management Operational Budgeting Capital Planning (Expansion & Replacements) Cost of Service Studies Rate Stability 1 & 2Q & 4Q & 2Q 2016 Replacement & Refurbishment Capital Planning Model Debt Refinancings* New Money* Long-Term Financial Model 2.0 (R&R) Cost of Service Study Debt Refunding(s)* Rate and Fee Modifications - Fixed v. Variable - R&R Charge - Water Rate Tiers - Reserve Targets Debt Refunding(s)* *Debt Refinancing and New Money based upon Debt Portfolio Optimization Project discussed later herein.

Debt Portfolio Challenges in EMWD’s debt service was expected to climb substantially in FY 2017 as the large State Revolving Fund loans begin to amortize. Debt service coverage levels were projected to fall over the next five years, given conservative growth estimates. District needed additional capacity to finance anticipated CIP projects. Increase by $12 million in FY 2017

Debt Portfolio Optimization Project: Planning Objectives and Measures Maintain ‘AA’ category credit ratings –Currently ‘AA+/Aa2/AA’ by Fitch, Moody’s and S&P Seek to achieve at least 1.9 times debt service coverage ratio Maintain strong reserve levels Effectively utilize and balance fixed and variable rate debt Seek to maintain favorable interest costs associated with the State Revolving Fund loan program while restructuring to obtain more flexible terms Allow or create flexibility for future borrowings and funding of capital projects Implement a subordinate lien with more modern covenants and terms (standalone indenture documents) 6

Debt Service before Portfolio Optimization 7 All senior lien debt Peak debt service near $64 million in 2017 Debt Capacity ~$65 million Final maturity in 2039

Debt Service after Portfolio Optimization initiatives in New working (sub) lien Peak debt service near $57 million in 2017 Debt Capacity ~$125 million Final maturity in 2047

2015 Refinancing Opportunities 2008G COP (2015A Refunding Bonds – Subordinate) –$50 million Standby Liquidity with Mizuho expires June 2015 –Feb 2015, staff and PFM issued RFP and received offers from six (6) banks –Staff recommends awarding a 3-year standby bond purchase agreement (SBPA) to Bank of Tokyo-Mitsubishi UFJ, LTD (BTMU) Lowest facility fee at 0.35 percent for 3-year term Favorable counterparty credit rating: BTMU long-term ratings at A+/A1/A –Staff recommends Bank of America (BAML) as underwriter and remarketing agent for the 2015A Refunding Bonds (current 2008G remarketing agent) SRF Loans potentially restructured and subordinated –San Jacinto RWRF loan potentially reamortized to 30-year term Provides additional debt service relief in 2017 through

2015 New Money Financings Recycled Water Program SRF –Application for $120 million SRF loan for Temecula RWRF recycled water and solar program Seeking subordinate, 30-year financing in Q Water and Recycled Water Financing –Evaluating $50 to $100 million in new money financing for water and recycled water projects –Reviewing alternatives based on revised LTFP Model forecast –Staff will update Board in April. 10

Potential Refunding Opportunities Staff, PFM and financing team monitor fixed-rate debt for opportunities to lower interest costs. 2006A COP may be redeemed in July 2016 –Refunding may reduce 2017 debt service peak –Advanced refunding could potentially save ~$6-$10 million NPV –However, advanced refunding costs ~$2 million for a 1+ year escrow –Staff will consider refunding the 2006A COP based on savings opportunity relative to escrow cost and interest rate sensitivity 11

2015 Plan of Finance – Next Steps 12 March 2015April 2015May 2015 Update LTFP Model Prepare Rating Agency presentation and necessary transaction documents Board Update Rating Agency Presentation Refund 2008G (2015A Bonds) Potentially issue New Money Financing Remarket 2012A SIFMA Index Bonds

Recommendation Authorize staff to negotiate the 2015A Refunding Bonds SBPA with BTMU, Authorize staff to proceed with the 2015A Refunding, including financing team assignments: –BAML as Underwriter and Remarketing Agent –PFM as Financial Advisor –Stradling as Bond Counsel –MUFG Union Bank as Trustee Specific financings will be brought for Board review and approval of structures and documents 13

Contact Information Charles Turner Director of Finance (951) x