HomeMy WebLinkAboutAgenda Packet - North Fork Water Company - 01/18/2018NORTH FORK WATER COMPANY
SPECIAL STOCKHOLDERS MEETING
31111 Greenspot Road
Highland, Ca 92346
January 18, 2018 – 2:00 pm
AGENDA
CALL TO ORDER
PLEDGE OF ALLEGIANCE
ROLL CALL OF BOARD MEMBERS
1.Approval of Agenda
2.Public Comments
3.Presentation of Draft Summary Appraisal Report of the North Fork Water Company
prepared by Brian J. Brady & Associates
4.Board of Directors’ Comments
5.Legal Counsel Comments
6.General Manager Comments
ADJOURN
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Pursuant to Government Code Section 54954.2(a), any request for a disability-related modification or accommodation, including
auxiliary aids or services, that is sought in order to participate in the above-agendized public meeting should be directed to the
North Fork Board Secretary (909)885-4900 at least 72 hours prior to said meeting.
BRIAN J. BRADY & ASSOCIATES
37850 De Portola Road
Temecula, California 92592
Telephone: 951.551.8933
Email: bjbassociates@aol.com
January 18, 2018
Mr. John Mura
General Manager/CEO
3111 Greenspot Road
Highland, CA 92346
Subject: North Fork Water Company
Mr. Mura:
Brian J. Brady & Associates present this Summary Appraisal Report (“Report”) for the
North Fork Water Company (“NFWC”) water system (“Utility”) as of January 31, 2018,
located in Highland, California. This opinion of value was prepared for use by the NFWC
for, among other purposes, establishing an opinion of the mutual water company’s stock
value.
This is a summary appraisal report with back-up analyses and support information to be
found in the report’s appendices.
As a precedent for developing the opinion of value, the Utility was evaluated using
approaches which are recognized throughout the industry as required for consideration by
the Uniform Standards of Professional Appraisal Practice (“USPAP”), 2016-2017
edition, including:
• Replacement Cost New Less Depreciation;
• Income; and
• Comparable Sales.
In each valuation approach, considerations and adjustments are made which are typically
conducted, considered, and/or performed in the determination of fair market value. The
applicable adjustments focus on providing existing and projected probable use of the
assets. Each of the defined valuation approaches results in a separate and distinct finding
which is reconciled and considered together with the other methods to formulate an
opinion of value for the subject assets.
To arrive at a final opinion of value, the cost approach was weighted at approximately
40%, the income approach at approximately 30%, and the comparable sales approach at
approximately 30%, for this special purpose property. The opinion of value presents my
opinion of the amount of money a knowledgeable buyer would pay and a knowledgeable
seller would accept, both willing to enter into a transaction with the Utility in its present
and probable use.
Utilities are special purpose properties with distinct characteristics. The subject assets, as
part of a system, are an essential public utility of the area.
The results of the calculations and analyses performed in accordance with each applicable
approach are detailed throughout the body of the Report and summarized as follows:
• Replacement Cost New Less Depreciation: $ 5,818,000
• Income: $ 3,043,000
• Comparable Sales: $ 4,280,000
Considering the results provided above in conjunction with my prior experience and
professional judgment, the opinion of the value of the NFWC utility system as of January
31, 2018 is: $ $4,524,000
On the question of the market value of a share NFWC stock, my analysis has determined
it to be $546.
I appreciate this opportunity to provide my services to you. Should you have any
questions or need further assistance, please feel free to call.
Very truly yours,
Brian J. Brady, P.E.
VALUATION CERTIFICATION
I certify that, to the best of my knowledge and belief, the statements of fact contained in
this Report are true and correct.
I further certify that the reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions, and are my personal, unbiased
professional analyses, opinions and conclusions.
I have no present or prospective interest in the property that are the subject of this report,
and I have no personal interest or bias with respect to the parties involved.
My compensation is not contingent upon the reporting of a predetermined value or
direction in value that favors the cause of the client, the amount of the value estimate, the
attainment of a stipulated result, or the occurrence of a subsequent event.
My analyses, opinions, and conclusions were developed, and this Report has been
prepared, in conformity with the requirements of the Code of Professional Ethics and the
Uniform Standards of Professional Appraisal Practice of The Appraisal Foundation.
I have made a personal inspection of the property that is the subject of this Report. All of
the above was relied upon for this Report.
Except as noted herein, no other person provided significant professional assistance to me
for this Report.
Note that no land or easement appraisal has been conducted here and the results thereof
may alter the opinions stated.
Note that this report was prepared for a specific use and no other use is authorized.
Brian J. Brady, P.E.
CA Professional Engineer No. C23749
SUMMARY APPRAISAL OF THE NORTH FORK WATER COMPANY
TABLE OF CONTENTS
Transmittal Letter
Valuation Certification
1.0 INTRODUCTION
1.1 Project Scope and Authorization
1.2 Utility Identification
1.3 Ownership Interest
1.4 Purpose and Use of Appraisal
1.5 Effective Date of Appraisal
1.6 Type of Property
1.7 Specialty Property – An Ongoing Utility Business
1.8 Going Concern, Intangibles, and Other Items
1.9 Summary of Data Collection
1.10 Summary of Confirmation Activities
1.11 Summary of Reporting Measures
1.12 Assumptions and Limiting Conditions
1.13 Significant Assumptions
1.14 Process and Procedures Followed
1.15 Highest and Best Use
1.16 Appropriate Market Used
1.17 Exclusions
1.18 Client
2.0 DESCRIPTION OF WATER SYSTEM
2.1 Overview
2.2 Water Supply
2.3 State Water Project
2.4 Storage
2.5 Transmission/Distribution
2.6 Shareholder Services
2.7 Historic Water Deliveries
2.8 Regulatory Compliance
3.0 WATER RIGHTS
3.1 General
3.2 Quantification
3.3 Water Right Valuation
4.0 VALUATION METHODS
4.1 General
4.2 Cost Approach
4.2.1 Depreciation Analysis
4.2.1.1 Average Service Life Schedule
4.2.2 Cost Determination
4.3 Income Approach
4.4 Comparable Sales Approach
4.5 Summary
5.0 COST APPROACH
5.1 Introduction
5.2 Replacement Cost Determination
5.3 Recommended Depreciation Schedule
5.4 Replacement Cost Analyses
5.4.1 Water System
5.4.2 Summary of RCNLD
5.5 Functional Depreciation
5.6 Replacement Cost New Less Depreciation
6.0 INCOME APPROACH
6.1 Introduction
6.2 Data Sources
6.3 Market Income Valuation Approaches
6.3.1 Capitalization of Earnings
6.4 Income Approach Analysis
6.5 Value Indicated by the Income Approach
7.0 COMPARABLE SALES APPROACH
7.1 Introduction
7.2 Factors Influencing Utility Acquisitions
7.2.1 System Assets
7.2.2 Regulatory Compliance
7.2.3 Competitive Market or Monopoly
7.2.4 Method of Acquisition
7.2.5 Context of Transaction
7.3 Market Summary
7.4 Comparable Sales Valuation
8.0 RECONCILIATION OF VALUATION APPROACHES
9.0 MUTUAL WATER COMPANY STOCK VALUATION
9.1 General
9.2 Valuation
10.0 VALUATION ADJUSTMENT
REFERENCES
BIO/RESUME
SECTION 1.0
INTRODUCTION
1.1 Project Scope and Authorization
This is a Summary Appraisal Report (“Report”) of the North Fork Water Company
(NFWC) water system (“Utility”). The Utility is a mutual water company that provides
service to shareholders of San Bernardino County in the City of Highland, California.
The General Manager/CEO of the NFWC has authorized Brian J. Brady and Associates
to provide a valuation of the Utility.
SCOPE OF WORK
As delineated in the June 26, 2017 Request for Proposals issued by NFWC the scope of
work is as follows:
1) Summarize the condition of NFWC’s existing system using NFWC’s water system
inventory and maps, photographs, field visits, inspection reports, and results of interviews
with people familiar with existing water system equipment and operation.
2) Summarize NFWC’s assets and liabilities using: Appraiser’s summary of condition of
existing system prepared under Task 1 above; property profiles and property appraiser
reports (by others if applicable); NFWC summary of water rights; and documents
uploaded to the NFWC DocShare site including Big Bear Watermaster reports showing
Bear Valley Mutual Water Company’s deliveries to North Fork Canal; NFWC summary
of water deliveries to shareholders; NFWC’s Articles of Incorporation, Bylaws and Rules
of the Ditch; NFWC current shareholder roll; and NFWC current financial statement.
3) Determine the current value of NFWC on a per share basis. The NFWC valuation will
be broken down into categories such as facilities, equipment, water rights, etc.
4) Prepare letter report containing Appraiser’s assumptions, sources of information, work
product, summary of current value of the NFWC, the effective date and life of the
valuation, and the process to adjust the valuation over time. Twelve (12) hard bound
copies of the report are to be provided to NFWC as well as electronic files.
5) Adhere to appraisal practices as required to conform to the Uniform Standards of
Professional Appraisal Practice (USPAP).
6) Prepare an Appraisal Summary Statement to assist NFWC staff in communicating the
appraisal results to NFWC shareholders.
7) Maintain timely communication with the assigned NFWC staff.
8) Create files and maintain all records for a period of seven (7) years.
9) Attend NFWC Board, Committee and/or Shareholder meetings, when requested.
Assume 1 meeting to review draft valuation findings with Board Committee, 1
Shareholder meeting, and 1 Board meeting.
1.2 Utility Identification
NFWC is a non-profit mutual water company located in Highland, California. There are
currently a total of 26 NFWC shareholders (representing 7156 shares), with East Valley
Water District (EVWD) owning 82.5% of the shares (7,156 total NFWC shares with
5,904 shares held by EVWD). EVWD manages the NFWC.
NFWC holds pre-1914 appropriative water rights to Santa Ana River water supplies in
trust for its shareholders.
NFWC owns a water delivery system including 50% ownership interest in the North Fork
Canal, as well as pipelines, diversion weir boxes and valves. The remaining 50%
ownership interest is held by EVWD. The North Fork Canal is nearly 8 miles in length
and runs in an east-west direction, beginning generally near the outlet (afterbay) of the
Southern California Edison Santa Ana River #3 Hydroelectric Plant located at the Seven
Oaks Dam and ending near the cross streets of Highland Avenue and Palm Avenue in
Highland, California. The NFWC water system’s transmission and distribution pipelines
are primarily comprised of steel, ductile iron and reinforced concrete pipe and range in
size between 12 and 48 inches in diameter.
NFWC’s water system does not include any surface water storage reservoirs.
The NFWC water system receives water delivered by Bear Valley Mutual Water
Company under agreements originally entered into in 1885 and affirmed by the January
17, 1977 stipulation and judgment entered by the San Bernardino Superior Court in Big
Bear Municipal Water District v. North Fork Water Company, et al. NFWC delivers
water to a total of approximately 12 connections serving shareholders and lessees of their
shares. NFWC’s Board of Directors establishes the amounts and schedules of its water
deliveries to shareholders and their lessees.
The NFWC water system is not designed for domestic use, and water delivered by
NFWC cannot be used for domestic purposes without treatment. The amount of water
NFWC is entitled to receive under the 1885 agreements includes monthly distributions
during the June-November time period totaling approximately 3,769 acre-feet per year,
and one-quarter of the annual river flow during the period of December through May.
NFWC has one class of shares. In order for shareholders to obtain water delivery, access
to the North Fork Canal and an approved measuring device/weir is required. Most of
NFWC’s shareholders do not take water delivery from NFWC.
1.3 Ownership Interest
The assets are part of an ongoing system with facilities, permits, etc. and a going concern
at the date of the appraisal. I have performed these services for the specified portion of
property in “fee simple,” which includes all rights (the bundle of rights) that can be
legally vested in an owner, subject to encumbrances whatever they may be. This fee
simple ownership includes ownership of the assets, fee simple ownership of easement
rights, water rights, water use allocation rights, any exclusive certificated area/franchise
property rights, as well as other tangible and intangible assets. In other words, the fee
simple value has been determined, without deduction for any liens or other encumbrances
that may exist. Fee simple ownership is the most comprehensive type of ownership since
the owner may dispose of the property in any manner they select. One possessing this
property has no restrictions or limitations upon ownership except those imposed by
governmental entities and those willfully created by agreement.
This appraisal does not contain a separate valuation of the land upon which contain the
operating assets. For purposes of this Report, it is assumed the real estate easements (20
feet wide by approximately 8 miles long, equaling approximately 19 acres) were secured,
without cost, in the initial construction of the open gravity masonry channel in the 1880s.
There are no records to clarify this assumption. Therefore, no value has been assigned to
easements. This is a significant assumption for the purpose of this Report and could
affect an opinion of value for the Utility. If a real estate appraisal is performed, then the
value found should be included in the total value.
1.4 Purpose and Use of Appraisal
The purpose of this appraisal is to provide the NFWC with the appraised value of the
Utility. The use of the appraisal is intended to allow an opinion of value on the 7,156
issued shares of Mutual Water Company stock.
1.5 Effective Date of Appraisal
At the request of the client, the effective date of this appraisal is January 31, 2018, to
coincide with the NFWC fiscal year-end, and is valid through July 31, 2018.
1.6 Type of Property
The Utility operates as a special purpose property permitted as a public water system.
The system is provided the rights thereof by the State of California, and by contract,
assemblage, and other means. Such properties have the configuration of a customer base
and utilize the local natural resources via permit rights, etc. of the specific community
that the facilities, operations, and management serve.
1.7 Specialty Property – An Ongoing Utility Business
AN ONGOING UTILITY BUSINESS The Utility includes assets, shareholders, its
service area and all other attributes of a fully functioning utility business. The Utility has
operated continuously since 1885. The utility system is considered a special purpose
property. There are four (4) criteria which establish whether property should be
considered special purpose property: a. Uniqueness; b. Property must be used for a
special purpose; c. No widespread market for the type of property; d. The property’s use
must be economically feasible and reasonably expected to be replaced. The function of
this utility property is to supply raw, untreated water to mutual shareholders in Highland,
California. The utility system was specially built for the specific purposes for which it
was designed, and continues to be used for those purposes. There is no question that
those assets would continue to be substantially used for utility purposes and they would
continue to be renewed, replaced and/or maintained for such purposes.
1.8 Going Concern, Intangibles, and Other Items
In the valuation of utility property using the cost approach, it must be recognized that the
replacement cost new less depreciation (“RCNLD”) only represents the component of
value of the physical assets. Those assets, however, are not idle, but are used to provide
service within the service area to a shareholder base as part of an ongoing business
operation. In other words, the value of a “live” utility functioning as an ongoing business
must be considered as part of an appraisal. Any purchaser would acquire a utility system
completely installed and operational with customers taking regular service and therefore,
immediately derive revenues at the full complement of connected customers as well as
purchase all permitted rights for water supply and operations and the future right to
service the remainder of the service area. Similarly, if a purchaser were to construct, in a
hypothetical situation, its own utility system, it would not have the ability to generate
revenues from a full complement of customers or have the ongoing bundle of rights for
this specific geographic area and would be required to successfully obtain permits to
provide service and such permits could be contested.
1.9 Summary of Data Collection
Data collection on this assignment involved water system inventory and maps,
photographs, field visits, inspection reports, and results of interviews with people familiar
with existing water system equipment and operation and other public sources of
information.
1.10 Summary of Confirmation Activities
A variety of analyses and surveys were used to confirm and/or cross-check the data and
information provided. Calls, comparisons of reports, field inspections, records testing,
and comparisons of source information were accomplished.
1.11 Summary of Reporting Measures
This Report is a Summary Appraisal Report with disclosures included.
1.12 Assumptions and Limiting Conditions
a. No responsibility is assumed for legal matters, nor is any opinion on the title
rendered herewith. I assume that the title to the property is good and
marketable.
b. All existing liens and encumbrances, if any, have been disregarded and the
property appraised as though it was free and clear.
c. The appraiser has made no survey of the property and, unless specifically
stated, assumed there are not encroachments involved.
d. It is assumed that the property is in full compliance with all applicable federal,
state, and local environmental regulations and laws unless non-compliance is
stated, defined, and considered in this Report.
e. It is assumed that all applicable zoning and use regulations and restrictions
have been complied with, unless a non-conformity has been stated, defined,
and considered in this Report.
f. It is assumed that all required licenses, certificates of occupancy, consents,
and other legislative or administrative authority from any local, state, or
national government or public entity or organization have been or can be
obtained or renewed for any use on which the value estimate in this Report is
based.
g. Proposed improvements, if any, on or off-site, as well as any repairs required,
are considered for purposes of this appraisal to be completed in a good and
workmanlike manner.
h. Responsible ownership and competent property management are assumed.
i. It is assumed that there are no hidden or unapparent conditions of the
property, soil, or structures which would render it more or less valuable.
Further, unless otherwise stated in this Report, the existence of hazardous
material or any other environmental problems or conditions, which may or
may not be present on the property, was not observed or disclosed. I have no
knowledge of the existence of such materials or conditions on or in such close
proximity that it would cause a loss in value. I, however, did not search to
detect such substances or conditions. The presence of substances such as
asbestos, urea formaldehyde foam insulation, radon, or other potentially
hazardous materials which could have an adverse effect on the value of the
property were not observed or detected in our inspections. The value estimate
is predicated on the assumption that there is no such material or condition on
or in the property that would cause a loss in value. No responsibility is
assumed for any such conditions, or for any expertise or knowledge required
to discover them.
j. No responsibility is assumed for the absence or presence of any endangered
species on this property. This appraisal assumes that there are no endangered
species which would prevent, restrict, or adversely affect any development or
improvement of this property.
k. No impact studies and/or special market, or feasibility analysis or studies
have been required or made unless otherwise specified. I reserve the right to
alter, amend, revise, or rescind any of the statements, findings, opinion, value
estimates, or conclusions contained herein if any of these studies require it.
l. Certain data used in compiling this report was furnished from sources which I
consider reliable; however, I do not guarantee the correctness of such data,
although so far as possible, I have checked and/or verified the same and
believe it to be accurate.
m. I have accepted as correct and reliable all information provided by the owner
and owner’s counsel, or the owner’s agents, which was used in the preparation
of this Report. All data came from sources deemed reliable, but no liability is
assumed for omissions or inaccuracies that subsequently may be disclosed in
any data used in the completion of the appraisal.
n. Since the date of value of the property is not an actual trial date, the appraiser
reserves the right to consider and evaluate any additional value influencing
data and/or other pertinent factors that might become available between the
date of this Report and the date of trial if applicable, and to make any
adjustments to the Report that may be required.
o. Neither I, nor anyone employed by me, has any present or contemplated
interest in the property appraised.
p. Possession of this Report, or copy thereof, does not carry with it the right of
publication, nor may it be used for any purpose by anyone except for the
client without the prior written consent of the client and in any event, only in
its entirely and with proper qualification.
q. Neither all nor any part of the contents of this report shall be conveyed to the
public through advertising, public relations, news, sales, or other media
without the written consent and approval of the author excepting appropriate
Freedom of Information Act requests.
r. No other legal agreements, customer agreements, developer agreements or
other utility-related agreements were disclosed or provided and therefore have
not been included in this Report.
s. It is assumed that any and all permits and easements can be transferred in the
event of an acquisition with minimal effort.
t. Acceptance of, and/or use of, this Report constitutes acceptance of the above
conditions and assumptions.
1.13 Significant Assumptions
The following significant assumptions were used in this work:
a. For purposes of this Report, it is assumed the value of real estate easements is
$0,
b. For purposes of this Report, the income approach conducted is as a not-for-
profit entity,
c. No major construction work is in progress, and no hypothecated corrective
future construction activity is considered to be accomplished by the Utility,
d. All assets are “as-is” without warranties or guarantees.
1.14 Process and Procedures Followed
The process utilized was confirming the valuation assignment, gathering the necessary
information for the appraisal activities, conducting, evaluating and considering the cost
approach under a replacement cost new less depreciation in continued use, the income
approach, and finally the sales comparison approach. Following the determinations from
each distinct approach, Brian J. Brady, P.E. weighed the approaches utilizing his training,
experience, and knowledge of the market and the subject system. Following the
weighting of the approaches, an Opinion of Value was determined and reported in this
Summary Appraisal Report.
1.15 Highest and Best Use
The highest and best use for the Utility is as a public water system. Note the utility
system is a special purpose property and also has the characteristics of an essential use.
Since the assets are specifically designed, configured, and constructed solely for the
public water utility system use, no alternate highest and best use was considered.
1.16 Appropriate Market Used
The appropriate market for the Utility is as a special purpose utility system providing for
utility service in the public utility market.
1.17 Exclusions
This appraisal has excluded the following aspects of the Utility and those aspects are not
included in the Opinion of Value delineated herein: a. Utility’s cash equivalents, accounts
receivable and deferred tax assets; b. Assumption of liabilities of the Utility; c. Assets
owned by other associated parties; and d. Activities, rights, and privileges of other
associated parties. In other words, this appraisal is of the assets of the Utility.
1.18 Client
The Client for this Report is the North Fork Water Company; Mr. John Mura, General
Manager/CEO.
SECTION 2.0
DESCRIPTION OF THE WATER FACILITIES
2.1 Overview
NFWC owns a 50% ownership interest in the North Fork Canal, a water supply system
consisting of pipelines, sand boxes, diversion weir boxes and valves. The remaining 50%
ownership interest is held by the East Valley Water District. The North Fork Canal is
nearly 8 miles in length and runs in an east-west direction, beginning generally near the
outlet (afterbay) of the Southern California Edison Santa Ana River #3 Hydroelectric
Plant located at the Seven Oaks Dam and ending near the cross streets of Highland
Avenue and Palm Avenue in Highland, California. While the original canal was
principally constructed as a four-foot wide and four-foot deep open masonry channel,
today the gravity system is a pipeline contained within the original confines of the
channel. The NFWC water system’s transmission and distribution pipelines are primarily
comprised of steel, ductile iron or reinforced concrete pipe and range in size from 12 to
48 inches in diameter, with over two-thirds of the eight mile system being 36 inches.
2.2 Water Supply
NFVW holds pre-1914 appropriative water rights to Santa Ana River water supplies in
trust for its shareholders.
The NFWC water system receives water delivered by Bear Valley Mutual Water
Company (BVMWC) under agreements originally entered into in 1885 and affirmed by
the January 17, 1977 stipulation and judgment entered by the San Bernardino Superior
Court in Big Bear Municipal Water District v. North Fork Water Company, et al. NFWC
delivers water to a total of approximately 12 connections serving shareholders and lessees
of their shares. NFWC’s Board of Directors establishes the amounts and schedules of its
water deliveries to shareholders and their lessees.
2.3 State Water Project
As discussed later in Section 3.2, State Water Project (SWP) deliveries are available to
the EVWD from the San Bernardino Valley Municipal Water District, which provides
backup water supply to the EVWD and other water agencies. Deliveries from the SWP
purchased by EVWD can be supplied to the the North Fork Canal approximately one
mile down gradient from the outlet (afterbay) of the Southern California Edison Santa
Ana River #3 Hydroelectric Plant located at the Seven Oaks Dam
2.4 Storage
The North Fork Water Company canal/pipeline operates as a gravity system, with no
storage facilities.
2.5 Transmission/Distribution
The water transmission/distribution system conveys raw water to 12 shareholder interests
and currently contains approximately 42,363 linear feet of pipe ranging in size from 12 to
48 inches in diameter. The pipe is constructed of various materials including polyvinyl
chloride (“PVC”), cast iron (“CIP”), reinforced concrete (“RCP”), and ductile iron
(“DIP”). The following Table 2.5, below, provides a listing of the water
transmission/distribution mains by size and type:
Table 2.5
Type Size (inches) Length (feet)
Cement Mortared Pipe (CMP) 48 1420.56
Ductile Iron Pipe (DIP) 16 1216.68
Ductile Iron Pipe (DIP) 30 2327.45
Ductile Iron Pipe (DIP) 36 13702.20
Polyvinyl Chloride (PVC) 12 481.68
Reinforced Concrete Pipe (RCP) 18 707.66
Reinforced Concrete Pipe (RCP) 27 458.66
Reinforced Concrete Pipe (RCP) 30 5034.46
Reinforced Concrete Pipe (RCP) 36 13992.45
Reinforced Concrete Pipe (RCP) 39 552.48
Riveted Steel (RS) 36 847.48
Steel (STL) 12 961.04
Steel (STL) 36 660.50
Totals 42363.3
2.6 Shareholder Services
Raw, untreated water from the transmission/distribution system is delivered by gravity to
shareholders through turnout (weir) structures. There were originally 53 weirs. Currently,
the system has a total of 13 operating delivery weirs serving 12 Shareholder interests.
Deliveries are restricted to a schedule per shareholder of twice monthly.
2.7 Historic Water Deliveries
The amount of water NFWC is entitled to receive under the 1885 agreements includes
monthly distributions during the June-November time period totaling approximately
3,769 acre-feet per year and one-quarter of the annual river flow during the period of
December through May. NFWC has one class of shares. In order for shareholders to
obtain water delivery, access to the North Fork Canal and an approved measuring
device/weir is required. A majority of NFWC’s shareholders either do not request or are
physically constrained from accepting water deliveries from NFWC.
2.8 Regulatory Compliance
Mutual water companies are organized under California Corporations Code 14300 and
operate under a myriad of local/statewide/federal rules and regulations.
Mutual water companies are regulated by California’s Water Code, Health and Safety
Code and must abide by open meeting and records disclosure laws similar to many public
water utilities.
In operating a public water system, mutual water companies are also subject to
requirements imposed by the State Water Resources Control Board and local Regional
Water Quality Control Boards.
The Corporations Code imposes numerous transparency requirements on mutual water
companies. Mutual water companies are required to hold annual shareholders’ meetings
and, in general, to distribute copies of financial statements to shareholders every
year. The Corporations Code also provides for the inspection of accounting books and
records by shareholders.
SECTION 3.0
WATER RIGHTS
3.1 General
As previously described, NFWC holds pre-1914 appropriative water rights to Santa Ana
River water supplies in trust for its shareholders.
The NFWC water system receives water delivered by Bear Valley Mutual Water
Company under agreements originally entered into in 1885 and affirmed by the January
17, 1977 stipulation and judgment entered by the San Bernardino Superior Court in Big
Bear Municipal Water District v. North Fork Water Company, et al. On an annual basis,
NFWC’s Board of Directors establishes the amounts and schedules of its water deliveries
to shareholders and their lessees.
The amount of water NFWC is entitled to receive under the 1885 agreements includes
monthly distributions during the June-November time period totaling approximately
3,769 acre-feet per year, and one-quarter of the annual river flow during the period of
December through May.
Appropriative rights to surface water are rights to use water that is surplus to the needs of
riparian owners and prior appropriators. Appropriative rights are based not on land
ownership, but on actual diversion and use of water. They are rights of priority, in that, if
the available surface water supply is insufficient to meet the needs of all appropriators,
the one with the earliest priority date is entitled to satisfy his or her needs fully before
those with later priority are entitled to any water.
An appropriative right may be established to use water for any reasonable, beneficial
purpose on any land no matter where located, and to store water from one season for use
in a later season, or from one year for use in subsequent years. Just as appropriative rights
are gained by use, conversely, once acquired, they may be lost wholly or in part by five
years’ nonuse during a time when the water was physically available for use.
Prior to 1914, appropriative rights could be acquired simply by posting or filing a notice,
and then diverting and using the water for reasonable, beneficial purposes (referred to as
“pre-1914 water rights”). Since 1914, California statutory law has required that an
application be filed and a permit obtained from a State agency, now the State Water
Resources Control Board. The State Board has the discretion to decide whether
unappropriated water exists, and whether the proposed use under the application is
reasonable, beneficial and in the public interest. If the State Board finds affirmatively on
these issues, it can issue a permit, and then, after the diversion and use facilities have
been constructed and the water appropriated has been fully put to beneficial use within
the time allowed, the State Board can issue a license confirming that the water right has
been perfected by use for the amount used.
Under Water Code sections 5100 through 5108, the holder of an appropriative water right
is required to file periodic statements with the State Board of diversion and use of water
under the water right. In accordance with section 5101(e), NFWC meets this reporting
requirement by diversions being submitted on its behalf by the Big Bear Watermaster.
3.2 Quantification
The agreement, dated May 23, 1895, between North Fork Water Company and Bear
Valley Land and Water Company (now Bear Valley Mutual Water Company) provides
for delivery of water to North Fork Water Company. As previously indicated, the amount
of water NFWC is entitled to receive under the 1885 agreement includes monthly
distributions during the June-November time period totaling approximately 3,769 acre-
feet per year, and one-quarter of the annual river flow during the period of December
through May.
Flows of one-quarter of the Santa Ana River, as measured on the river at a point
described as “The Divide” from December to May of each year are highly variable, often
zero. Based upon the recorded deliveries from the historical ten-year period (2007-2016),
the average annual deliveries are calculated to be 4,146 acre-feet (or 110% of the
guaranteed deliveries).
In two of the approaches to value (cost and comparable sales) it is assumed that the utility
is an ongoing business and not subject to dissolution; and therefore, the water rights
cannot be separated from the operating assets and valued on the open market. Thus, in
these valuation methods, the value of an acre-foot of NFWC pre-1914 water rights is
determined by the cost of a substitute water supply. In this case that supply is determined
to be State Water Project (SWP) water (purchased by EVWD).
The quality of NFWC water is highly variable, depending upon the time of year.
Particularly with respect to turbidity, there are times during the year (e.g., influences
from storm runoff) that EVWD operators divert the entire flow of the canal to
replenishment spreading grounds near the headworks of the canal due to high turbidity,
organic loading or trash content. During these periods EVWD purchases SWP substitute
water to serve NFWC shareholders. In terms of NFWC water rights valuation, EVWD’s
decisions to institute the above procedure, and substitution to the canal water delivery
quality should not be included in the value analysis.
3.3 Water Right Valuation
The NFWC includes assets, shareholders, its service area and all other attributes of a fully
functioning utility business and has operated continuously since 1885. The function of
this utility property is to supply raw, untreated water to mutual shareholders in Highland,
California relying upon the company’s pre-1914 water rights (held in trust for the benefit
of its shareholders). The utility system was specially built for the specific purposes for
which it was designed, and continues to be used for those purposes. There is no question
that those assets (including water rights) will continue to be substantially used for utility
purposes and they will continue to be renewed, replaced and/or maintained for such
purposes.
Therefore, in regard to water rights, this valuation cannot consider the selling off of the
rights to the regional market. The rights value is determined as an integral part of the on-
going utility operation.
There are two sources of supply for the canal: 1) Santa Ana River rights, and 2) the
SWP. In the absence of zero-cost water from the river, deliveries of SWP water are $125
per acre-foot. Thus, the annual benefit of an acre-foot of water right is $125. Since it has
been reported by shareholders that additional filtering of canal water from the river is
necessary before beneficial use, due to its higher turbidity levels, I have adjusted the
annual benefit per acre-foot by 20% (or $25). Total annual benefit of NFWC’s water
rights becomes $414,600 (for an average of 4146 acre-feet).
SECTION 4.0
VALUATION METHODS
4.1 General
The objective of this Report is to establish an opinion of the fair market value of the
Utility. Fair market value assumes that both the buyer and the seller are aware of all
relevant information and that neither party is under the compulsion to act. The method
utilized herein to provide a basis for an opinion of value consists of the reconciliation of
three approaches consisting of:
(i) The cost approach;
(ii) The income approach; and
(iii) The comparable sales approach
These approaches analyze various aspects of the utility system, including the physical
conditions of the existing utility system, the cash flows anticipated to be generated by the
utility system in the future, and finally, the transaction factors related to the acquisition of
similar systems in the past. Even though none of these methods may be considered ideal
on a stand-alone basis, since each evaluates a particular facet of the utility system, the
consideration and relative weighting of all three provides valuable input when
considering other factors and the use of judgment in determining the value of the Utility.
The remainder of this section provides a general description of the valuation approaches
utilized for the Report.
4.2 Cost Approach
Replacement cost new less depreciation (RCNLD) is a cost approach method selected for
this report that is commonly utilized in the determination of estimated value in utilities
and has been an accepted method in litigation cases involving the acquisition of utilities
throughout the United States. The primary reason for this is the fact that most utilities are
comprised of complex treatment, pumping, and piping networks which all have various
service lives and different years of installation. In order to address these technically
complex facilities, the RCNLD method has been developed.
There is a difference between the reproduction cost and the replacement cost of utility
assets. The reproduction cost is a duplication of exactly the same facilities (which in the
case of the NFWC would entail replacing riveted steel with riveted steel). In contrast, the
replacement cost is the provision of facilities that would be available today with their
improved efficiencies and more effective cost utilizing the commercially available
materials, equipment, etc. complete as one single project and obtaining the economy of
scale thereof. The replacement cost method assumes that the most economical sequence
of construction is utilized. This means that the cost of restoration, impacts of conflicts,
etc. are not included. In addition, only one (1) start up and shut down cost is included.
Similarly, any premiums or overtime costs or special procurement
mobilization/demobilization costs are not included other than for the single large
economic construction project. The replacement cost approach excludes excess capital
which an investor would normally not pay for in the existing facilities. Rather, the
approach is based upon the theory of the substitution and the prevailing market concept
that no investor would pay more than the cost to replace the same system with the same
characteristics.
There are three (3) components to the overall depreciation taken in this approach. The
first component of depreciation, and the first to be applied, is the physical depreciation of
the asset. The second level is the functional obsolescence of the existing asset and is
deducted from the replacement cost new less physical depreciation. The functional
obsolescence is associated with the facilities themselves and is inherent to the Utility
itself being derived from construction, configuration, operations, management, and
administration. The final component in the method is for external obsolescence. External
obsolescence accrues from all factors impacting the Utility. The impact of regulation,
customer acceptance, historical rate and charge regulation or lack thereof, the ability to
generate excess revenues sufficient to support the physical asset value, market conditions,
development conditions, and many other factors external to the system itself.
The RCNLD analysis is based upon the following assumptions:
1. All Utility physical assets are designed, permitted and constructed in one
continuous effort.
2. The construction activities are assumed to follow the same historical sequence
as that followed in the service area. For example, water mains, gravity
collection mains, force mains and manholes were assumed to be constructed
before or simultaneously with the roads and driveways.
3. The engagement of general contractors, acting for the Utility and under its
supervision, utilizing current construction practices and procedures to replace
the property in such a manner so as to achieve all efficiencies that these
procedures and practices would allow.
4. The replacement unit prices are adjusted based on the appropriate index.
5. The replacement unit prices and/or indices include the costs of all labor,
material, and equipment directly related to specific items.
6. The replacement cost includes the costs associated with overhead and
engineering fees incurred throughout the course of the project.
4.2.1 Depreciation Analysis
Depreciation is defined basically as the loss of value or worth of a property from all
causes including those resulting from physical deterioration, functional obsolescence, and
economic obsolescence. These causes and their effects are usually unique to each utility.
4.2.1.1 Average Service Life (ASL) Schedule
The appropriate ASL schedule for valuation of any utility should consider manufacturers’
anticipated service lives, maintenance of facilities, service lives of like components and
the utility system as determined by field inspections. This information is utilized to obtain
the ASL for the Utility assets under normal service, including proper maintenance and
repair. I have incorporated ASLs being used by EVWD in this appraisal. The ASLs
utilized in the replacement cost approach are shown in Section 5.3.
The effects of both the level of maintenance performed on the Utility and the deficiencies
of the Utility on the value of the assets are addressed later in this analysis. These effects
are determined based on inspections, evaluation, and analyses of the Utility assets which
provide specific functions for the Utility. The impacts from lack of maintenance and
observed deficiencies are then applied in the replacement cost analysis.
4.2.2 Cost Determination
The use of construction cost indices in the determination of the estimated cost-new
valuation is of primary significance. These construction cost indices are obtained from
Engineering News Record.
4.3 Income Approach
The income approach values a utility based on the available cash flows anticipated to be
generated in the future. The theory behind this particular approach is based upon the
concept of converting the anticipated financial benefits of ownership in the future to an
estimate of the present value in today’s environment. Depending upon the circumstances
surrounding each acquisition, the income stream may be based on the net operating
revenues derived from existing and future growth as well as the value of capital
contributions received from new system growth in the future. Utilizing this approach, the
net income for the utility is projected over a specific timeframe and subsequently
expressed in terms of its total value based upon the use of an appropriate capitalization
factor. In order to reflect future financial and operational conditions as accurately as
possible, this approach relies heavily on past and present financial data such as that found
in audited financial statements and financial reports.
4.4 Comparable Sales Approach
The comparable sales approach to utility valuation assumes that knowledgeable buyers
and sellers of water, wastewater and reclaimed utilities generally know the “Market” for
such utility systems. The purpose of this market approach is to examine the history of
water utility acquisitions, and to analyze the conditions under which the systems were
acquired in an effort to arrive at an implied purchase price for the subject system.
There are many factors that are involved in the determination of an acquisition price of a
utility system. These factors create both similarities and differences between the
transactions, which in essence, result in the formation of a well-mixed market of utility
sales. The comparable sales approach considers such factors and makes adjustments as
necessary in order to arrive at an implied value for the Utility.
4.5 Summary
In an effort to formulate an opinion of value for the Utility proposed to be acquired, this
Report considers three valuation approaches. The three valuation approaches include the:
1) cost approach; 2) income approach; and 3) comparable sales approach. Each approach
is independent and results in a separate and distinct finding. Such findings are
subsequently weighted and considered together with other factors to formulate an opinion
of value for the Utility. The resulting opinion of value is based upon the foregoing
findings as well as professional experience.
SECTION 5.0
COST APPROACH
5.1 Introduction
This section of the Report provides the opinion of value utilizing the Cost Approach for
the Utility assets that are currently providing water utility services. The methodology
selected for use in the cost approach valuation of the above Utility is replacement cost
new less depreciation (RCNLD). This method is commonly utilized in the determination
of value of public utilities. The primary reason for using the RCNLD method is the fact
that most utilities are comprised of complex treatment, pumping, and piping networks
with various service lives and years of installation. In order to address these technically
complex facilities, the RCNLD method has been chosen for the cost approach for
valuation.
5.2 Replacement Cost Determination
The replacement cost of this special purpose property in place and in-service is
determined by calculating the construction cost of the same, equivalent or like-kind new
facilities which the marketplace would install and deducting the various forms of
depreciation. The determination of replacement assumes that replacing the Utility is one
large project with inherent economies of scale which are represented in the determination
of replacements costs.
Given that asset records provided for this valuation are summarized by year of
acquisition only, with no specific detail on type of asset (i.e. pipeline, weir, headworks,
etc.), several assumptions were necessary;
• Unless otherwise indicated, assets were assumed to be an integral component of
the North Fork Canal, and, as such are considered to have a 50 Average Service
Life.
• The average service life schedule of the EVWD was applied to assets not
identified with the North Fork Canal.
Therefore, replacement costs are derived from aged operating asset records contained in
the NFWC financial statements for 2016-2017. Aged assets were escalated to present day
(2018) values using Engineering News Record construction indices (for Los Angeles
region).
5.3 Recommended Depreciation Schedule
EVWD manages the NFWC operations under agreement. EVWD’s policy regarding
capital asset depreciation is as follows:
“Depreciation Method and Expected Useful Life of Assets - All depreciable assets are
depreciated using the straight line method of depreciation. Depreciation begins in the
year the capital asset was acquired. The estimated lives of acquired assets are assigned in
the following manner:
· Source of Supply - 30 Years
· North Fork Canal - 50 Years
· Pumping Plant - 25 Years
· Treatment Plant - 50 Years
· Reservoir - 60 Years
· Tank - 50 Years
· Pipeline - 50 Years
· Meter - 30 Years
· Fire Hydrant Meters - 20 Years
· Building - 50 Years
· Land and Building Improvements - 15 Years
· General Equipment - 5 Years
· Vehicles - 5 Years
· Heavy Equipment and Vehicles - 10 Years”
Each Utility component has been assigned an average service life (as shown on Table 5.9,
column 3). The depreciation has been taken on a straight-line basis utilizing the
components and the average service lives.
5.4 Replacement Cost Analyses
This Report includes the replacement cost analyses as conducted by Brian J. Brady, P.E.
The quantities and inventory of assets were retained from the reports provided by the
NFWC. Dr. Brady inspected the Utility on July 24, 2017. The results of the replacement
cost new less physical depreciation determination are summarized in the following sub-
sections.
5.4.1 Water System
The water system facilities were constructed originally in 1885 as a gravity delivery
system of concrete channel, tunnel and riveted steel flumes with sandboxes and turnout
weirs. Since that time, the water system has been converted to a gravity pipeline, with a
significant amount of construction during the 2008 to 2009 timeframe.
The extent of the water system assets is detailed in Table 5.6.
The new replacement cost value of these system assets is $4,686,553. The total physical
depreciation of these assets using the average service life schedule is $1,854,213. The
remaining replacement cost new less physical depreciation (RCNLD) is $2,832,340.
5.4.2 Summary of Replacement Cost New Less Physical Depreciation
As shown in Table 5.6, the replacement cost new less physical depreciation is $2,832,340
for the water system. This shows that the utility assets have an approximate composite
accumulated depreciation of 40% for water facilities.
5.5 Functional Depreciation
Functional depreciation for system deficiencies (such as: major loss of operable delivery
weirs, urban encroachment) and deferred maintenance is cured by the use of the
replacement cost approach and by a deduction of 25% from the RCNLD determination.
5.6 Replacement Cost New Less Depreciation
The summary of the replacement cost new less depreciation of property, plant and
equipment is shown below:
Table 5.6
Property, Plant and Equipment
1 2 3 4 5 6 7 8
Year
Acquired
Balance @
January 31,
2017
(dollars)
Average
Service
Life
(years)
Remaining
Life
2018
(years)
RCN
Factor
(ENR)
RCN Value
(dollars)
R.L.
Depr.
Factor
RCNLD
Value
(dollars)
1940 67,610 50 1 18.0 1,216,980 .05 60,849
1985 4,729 50 18 2.22 10,498 .36 3,779
1995 50,820 50 26 1.85 94,017 .52 48,889
1997 37,511 50 29 1.82 68,270 .58 39,597
1999 68,937 50 31 1.77 122,018 .62 75,651
2002 9,941 50 33 1.64 16,303 .66 10,760
2003 2,840 15 1 1.61 4,572 .07 320
2004 3,010 50 35 1.47 4,425 .70 3,097
2009 2,493,592 50 41 1.23 3,067,118 .82 2,515,037
2011 26,205 50 43 1.20 31,446 .86 27,044
2014 34,333 50 46 1.12 38,453 .92 35,377
2014 1,310 20 16 1.12 1,467 .80 1,174
2017 10,563 50 49 1.04 10,986 .98 10,766
Totals 2,811,401 4,686,553 2,832,340
Column 1 Asset Year
Column 2 Original Asset Cost
Column 3 Average Service Life
Column 4 Remaining Life (2018)*
Column 5 Engineering News Record Escalation Factor (1913 = 100)
Column 6 Reconstructed Cost New (2017) (Column 2 x Column 5)
Column 7 Remaining Life Factor (Column 4 / Column 3)
Column 8 Replacement Cost New Less Depreciation
Applying the functional depreciation (25%) to the RCNLD total in the table above results
in a property, plant and equipment value of $2,124,255. For purposes of this valuation,
50% of the asset value, specifically $1,062,128, represents the NFWC ownership interest.
The total RCNLD for the NFWC is equal to the value of the operating assets (property,
plant and equipment of $1,062,128) plus the present value of water rights of $4,755,462
(see Section 7.4) resulting in $5,817,590.
* As of January 31, 2018 (NFWC annual fiscal year-end)
SECTION 6.0
INCOME APPROACH
6.1 Introduction
The purpose of this section of the Report is to provide an indication of the fair market
value of the Utility based on the income approach. In general, the income approach
values the water system based on the available net cash flows generated from the ongoing
operations. Historical financial and customer data is utilized together with certain pro
forma adjustments in order to develop the projected operating results for the system and
estimate future net cash flows available to the current owner (in the hands of the seller).
The annual cash flows are then analyzed in relationship to an assumed required rate of
return. Under this approach, the value of the system is assumed to be equal to the value of
the future net cash flows available to the current owner, if such ownership is maintained
throughout the projection period.
6.2 Data Sources
The analysis developed herein utilize data available to me. The information provided in
such data sources has not been independently verified and for purposes of this analysis
the information is assumed to be accurate and reliable. The income approach contained
herein uses the annual reports for calendar years ended January 31, 2016 and January 31,
2017 as prepared by Van Lant & Frankhanel, Certified Public Accounts.
6.3 Market Income Valuation Approaches
The income approach generally measures the buyer's risk against the potential earnings of
a company. Two methods are typically used to provide an indication of value –
capitalization and discounting. Both methods use a formula to calculate the value of a
company based on future profits. While capitalization uses a formula based on past
performance, the discount formula takes into account the risk factors that would
potentially be taken into account by the buyer. Given the financial data available for
analysis, Capitalization of Earnings method was selected. A brief description of the
Capitalization of Earning Method (“Cap Rate”) is shown below.
6.3.1 Capitalization of Earnings
In its simplest form, the capitalization method basically divides the business expected
annual earnings by an appropriate capitalization rate. The idea is that the business value
is defined by the business earnings and the capitalization rate is used to relate the two.
Capitalization rates provide a relatively non-complex tool to use for valuing property
based on its current income and/or cash flow ability. A comparatively lower
capitalization rate would indicate less risk associated with the investment (increasing
demand and value for the product), and a comparatively higher cap rate for a property
might indicate more risk (reduced demand and value for the product). A Cap Rate
approach to income valuation reflects a general market approach.
6.4 Income Approach Analysis
In order to calculate a value for the Income Approach, the income to be evaluated must
be identified. As discussed in the book “Valuing a Business: the Analysis and Appraisal
of Closely Held Companies” by Shannon P. Pratt, et al, the income statement variables
most often used to develop business value measures for an indication of the market value
of invested capital are:
• Net sales (gross revenue less cost of goods sold (“GOCS”)
• Earnings before interest and taxes (“EBIT”)
• Earnings before depreciation, amortization, interest, and taxes (“EBITDA”)
• Net free cash flow available on invested capital
For purposes of the Income approach analysis presented herein, I have selected the
EBITDA income streams to analyze, providing the highest level of stated income. The
development of the income approach to valuation analysis required certain assumptions
and considerations with regard to financial, economic, and operational conditions that
may occur in the future. Although such assumptions and considerations are applied based
on current and historical data pertaining to the Utility, to the extent that actual future
conditions differ from those utilized herein, the results may vary from those in the
analysis. The principal assumptions and considerations utilized in the income approach
are summarized as follows:
1. Based on an historical review, the agricultural land irrigated with canal
water has been largely converted to urban uses. Consequently, of the
original 53 weir turnouts on the canal, only 13 weirs are still active,
representing 12 shareholder interests. For purposes of these projections, I
have assumed the number of shareholder connections annually will remain the
same and, therefore, held connections constant over the projection period.
2. For the purpose of this analysis, it is assumed that the average annual
deliveries will remain relatively constant throughout the projection period.
3. For the purpose of this analysis I assumed that the water system will operate
as it has been under EVWD management.
4. Assessment increases over time are expected to, at minimum, average equal to
increases in operating and maintenance (O&M) expenses; thereby generating
constant net revenues (EBITDA).
5. For calculating capitalized earnings, a composite discount rate of 6.0 percent
(6%) was assumed. The discount rate is based on the Utility being:
• Owned and operated as a public, not-for-profit entity, equating to 5%
• Additional business risk (older system, urbanization, potential smaller
customer base), equating to 1%.
6.5 Value Indicated by the Income Approach
Based on current EBITDA, an income analysis using capitalized earnings was prepared
for the water system of the Utility. The results of this analysis are:
Income Approach (Capitalization of Earnings): $ 3,042,880
SECTION 7.0
COMPARABLE SALES APPROACH
7.1 Introduction
The purpose of this market approach is to examine the history of water utility acquisitions
and analyze the conditions under which the systems were acquired in an effort to arrive at
an implied purchase price for the water system. The potential list of utility sales is
narrowed down to those that are considered comparable to the subject system. In order to
compare the different transactions, a variety of factors were considered.
7.2 Factors Influencing Utility Acquisitions
There are many factors involved in the agreement of an acquisition price for a utility
system. The following is a discussion of several important factors that impact the
acquisition price of utility systems.
7.2.1 System Assets
Utility systems vary considerably in their size, physical condition (which is sometimes an
indicator of age or level of maintenance provided), as well as the number and types of
customers. All of the above are components that form the utility’s assets to be transferred.
It is common that knowledgeable buyers, as part of their due diligence, of utility systems
look closely into these components prior to agreeing upon a purchase price. The
following areas regarding system assets are often considered in an evaluation:
a. Type of service provided (water only, wastewater only, or both)
b. Extent and physical characteristics of the utility systems and aggregate effective
age of the system
c. Water and/or wastewater treatment capacities
d. Actual customers connected to the utility systems and their characteristics
e. Type of sale (context of transaction)
f. Location of the system
7.2.2 Regulatory Compliance
The extent and/or magnitude of litigation and the risk of loss associated with as well as
fines or ordered corrective actions effect system pricing.
7.2.3 Competitive Market or Monopoly
The exclusivity of the service territories can be a major factor influencing an acquisition
and the pricing of a utility. If a utility is granted either franchise rights that protect its
service territories and make the utility a sole provider of utility services within such
territories, the value may be substantially enhanced. However, if other private or public
utilities can provide similar services in the same territories, the opposite effect may occur.
7.2.4 Method of Acquisition
The majority of the utility transactions occur through negotiations between interested
buyers and motivated sellers.
7.2.5 Context of Transaction
It is important to consider the variance to the “industry standard” terms and conditions of
the purchase and sale agreement. If special terms would create value, then adjustments
are made.
7.3 Market Summary
There are no recent records of similar mutual water company sales to serve as a reference
point. The market for the NFWC is, therefore, very limited based upon the following
known constraints:
• The water deliveries to shareholders are completely within the service
territory of EVWD. Therefore, NFWC, if sold to a third party other than
EVWD, is not a protected monopoly
• Either by proportionality as a shareholder or provisions of the 1988 agreement
with the Bear Valley Mutual Water Company (BVMWC), EVWD controls
over 90% of the operating assets of the NFWC
• Besides EVWD, BVMWC is the most likely potential purchaser of NFWC,
principally for the water rights
• With either EVWD or BVMWC, pricing of NFWC water rights (with
adjustments for quality and variability) will likely be tied to the avoided cost
of SWP water
7.4 Comparable Sales Valuation
As described in section 3.3, the annual benefit of water rights to 4146 acre-feet of Santa
Ana River water, after adjusting for quality and variability, is $414,600. Assuming a cost
of capital of 6%, a 20-year stream of benefits yields a net present value (NPV) of
$4,755,462. However, at this NPV, both EVWD and BVMWC may be indifferent as to
investing in the water rights versus buying SWP water. Further, BVMWC would likely
see no value in the NFWC operating assets and EVWD would already have operating
control.
A negotiated sale to either agency (assuming a negotiated 10% reduction in water rights
NPV) would result in a sales price of $4,279,916.
SECTION 8.0
RECONCILIATION OF VALUATION APPROACHES
The cost, income, and comparable sales approaches for the Utility are considered in this
section. The numeric results for each approach are presented below (rounded to the
nearest $1,000):
Replacement Cost New Less Depreciation $ 5,818,000
Income $ 3,043,000
Comparable Sales $ 4,280,000
The cost approach provides a specific valuation for the Utility. The asset listing provided,
along with field observations, provide the basis for producing the cost approach. This
approach includes the adjustments to the system and the loss of value from physical,
functional, and external depreciation, when applicable. This approach includes the
documented value/cost of assets as of January 31, 2017 and is an accurate representation
of the complex, special purpose property. This approach considered the Utility values
separately as described in Section 5. Using this approach, I have valued the combined
Utility at $5,818,000, and I have quantified the weight for this approach at approximately
40%. Presently, in the marketplace, the cost approach is not determinate of value, but
rather is more a measure of asset surety.
The income approach values the Utility based on the available annual cash flows
anticipated to be generated from the ongoing operation of the system analyzed in
relationship to an assumed required rate of return, in the hands of the seller. I have valued
the Utility at $3,043,000 using this approach. I have quantified the weight of the income
approach at 30%.
In the real-estate marketplace, comparable sales approach is more determinative of value.
Due to the limited market and context of transactions included in this analysis, however,
it is difficult to justify a more substantial weighting to this approach. Based on those data,
I have included the sales comparison approach on this special purpose property at
$4,280,000. I have quantified the weight to be given the approach at approximately 30%.
The comparable sales approach, therefore, has been weighted equal to the income
approach for this Utility.
Considering the results provided above in conjunction with my prior experience and
professional judgment, the opinion of the value of the NFWC water utility system assets
as of January 31, 2018 is: $4,524,000.
SECTION 9
MUTUAL WATER COMPANY STOCK VALUATION
9.1 General
As previously noted, the NFWC is a non-profit mutual water company located in San
Bernardino County and the city of Highland, California. The company was incorporated
in 1885 and has perpetual existence. There are currently a total of 26 NFWC shareholders
(representing 7156 shares), with East Valley Water District (EVWD) owning 82.5% of
the shares (7,156 total NFWC shares with 5,904 shares held by EVWD). EVWD
manages the NFWC under agreement.
NFWC holds pre-1914 appropriative water rights to Santa Ana River water supplies in
trust for its shareholders.
There is one class of shares. Each shareholder is obligated currently for two annual
assessments per share owned: 1) a $25.00 operational assessment, and 2) an $18.00
capital improvement assessment.
Shareholders have the following rights and obligations:
• Each shareholder has a right to the annual yield of the North Fork Canal
proportionate to the number of shares held.
• Each shareholder must take the water allocation from an approved turnout (weir)
on the canal.
• Each shareholder must take delivery two times per month as prescribed in the
“Rules of the Ditch” dated April 4,2017.
• Each shareholder delivery must be for a minimum of 10 miner’s inches in a 24-
hour run (129,250 gallons).
• Shareholders unable to comply with the above forfeit their access to canal water.
Over the years, the agricultural land irrigated with canal water has been largely converted
to urban uses. Consequently, of the original 53 weir turnouts on the canal, only 13 weirs
are still active, representing 12 shareholder interests.
9.2 Valuation
As calculated in Section 3.3, the annual benefit to the NFWC utilizing the water rights to
an average of 4146 acre-feet of the Santa Ana River equates to $414,600. Breaking down
the benefit on a per share basis produces an annual benefit of $57.94, representing an
annual supply benefit of .579 acre-feet.
Assuming a typical shareholder’s blended interest rate (combination of long term
mortgage and short term personal credit rates) of 6%, and projecting the annual benefit
for the next 10 to 20 years, yields a net present value, per share, of $426.44 to $664.57;
or, an average of $546 (rounded).
Since the Utility is an on-going business, the individual shareholder has no equity interest
in the operating assets of the NFWC that can be monetized in the stock value, as it could
if considering a “break up” value.
SECTION 10.0
VALUATION ADJUSTMENT
As indicated in Section 1.5, this valuation is effective January 31, 2018; and, is valid for
six months. Thereafter, valuation calculations will need to reflect any significant changes
in the following data inputs:
• Substitute water (presumably SWP) price per acre-foot
• Changes in the rolling ten year average annual deliveries (in acre-feet) to
shareholders from the North Fork Canal
• Changes in interest and capitalized earnings rates assumptions
• Engineering News Record cost indices (Los Angeles region)
• Most recent NFWC financials
REFERENCES
NFWC Governance Documents
DATE DESCRIPTION
01/13/1885 Articles of Incorporation of North Fork Water Company (NFWC)
06/01/1915 Amended Articles of Incorporation of NFWC
05/07/1925 Second Amended Articles of Incorporation of NFWC
11/30/1931 Third Amended Articles of Incorporation of NFWC
1950 1950 NFWC Bylaws (redlined to show proposed 2013
Amendments)
2013 2013 NFWC Bylaws
2017 2017 NFWC Bylaws
1989-2009 North Fork Canal Rules of Operation (the “Rules of the Ditch”)
2017 Amended North Fork Canal Rules of Operation (the “Rules of the
Ditch”)
Deeds, Agreement and Judgments
DATE DESCRIPTION
02/05/1885 Indenture between parties and NFWC re Interest and Water Rights
05/23/1885 Memorandum/Agreement between NFWC, Bear Valley Land and
Water Company and owners of water in the North Fork Ditch of the
Santa Ana River and Cram and Van Leuven Ditch re supply
allowance, capacity, construction and management of water rights
06/27/1885 Supplemental Agreement between Bear Valley Land and Water
Company and NFWC modifying Section 4 of Agreement
05/01/1895 Deed of Trust between Grantors (stockholders) & NFWC
continuing 1885 trust deed until December 31, 1934
02/19/1925 Indenture between The Cram & Van Leuven Water Company and
NFWC
10/11/1966 Joint Use Agreement between NFWC & Bear Valley Mutual Water
Company and the State of California
07/22/1968 Consent to Common Use Agreement by NFWC & Bear Valley
Mutual Water Company
05/03/1976 Cooperative Water Project Agreement - Santa Ana River - Mill
Creek
01/18/1977 Stipulation and Judgment (Big Bear Municipal Water District v.
North Fork Water Co.)
01/27/1977 Agreement between NFWC & East San Bernardino County Water
District re water rights
09/06/1977 Final Order of Condemnation – re San Bernardino Valley
Municipal Water District v. North Fork Water Company, et al.
01/04/1982 Agreement between NFWC & Bear Valley Mutual Water Company
agreeing to the establishment of required standards and conditions
for changes requested or required to be made to the North Fork
Canal by reason of land development
01/04/1982 Notice of Right of Easement – by NFWC and the Bear Valley
Mutual Water Company
03/07/1988 Agreement for the Transfer of the North Fork Canal between East
Valley Water District & Bear Valley Mutual Water Company
07/21/2004 Seven Oaks Accord
08/2005 Settlement Agreement – Among San Bernardino Valley Water
Conservation District, San Bernardino Valley Municipal Water
District and Western Municipal Water District adding SBVWC to
the Seven Oaks Accord
Water Deliveries
DATE DESCRIPTION
2012-2016 Big Bear Watermaster Annual Report Tables
2007-2017 NFWC Water Deliveries
Tax Bills
DATE DESCRIPTION
2016 “Land” Tax Bills
2016 “Improvements” Tax Bill
Other
DATE DESCRIPTION
2016-2017 NFWC Financial Statements
March 14, 2016 Power Point Presentation to NFWC Shareholders (Summary of
NFWC Governance and Water Rights)
09/25/2017 Interview notes with EVWD staff
09/25/2017 Interview notes with BVMWC staff
BIO/RESUME
Brian J. Brady, P.E.
Brian J. Brady has over 35 years of engineering and management experience in both the
public and private sectors of western electric and water utilities. He maintains an
independent management consulting practice, focusing on water resource assessment,
asset valuation (including water rights) and strategic operations of water utilities.
Dr. Brady currently serves as General Manager of the Fallbrook Public Utility District
(FPUD), and partners with Camp Pendleton Marine Base to develop critically needed
local water supplies (Santa Margarita River Conjunctive Use Project). He also is a
member of the Board of Directors of the San Diego County Water Authority.
From 2008-2011 he was the General Manager of the Imperial Irrigation District (IID), a
water and power authority encompassing 6,500 square miles in southern California. IID
is the largest irrigation district in the United States at 3.1 million acre-feet in annual
deliveries, and is also the third largest public sector electric utility in California (1,000
MW peak demand.)
From 2003 to 2007, as General Manager of Rancho California Water District (RCWD),
Dr. Brady directed the operations of the Temecula-based district’s water, wastewater and
reclamation divisions. Prior to Rancho California Water District, he served as general
manager of the Water Replenishment District of Southern California (WRD), and was
responsible for groundwater protection, enhancement and replenishment over a 400-
square mile region of Los Angeles County.
From 1995 to 2000, he was Chairman and CEO of the Dominguez Water Company, an
investor-owned utility in Long Beach, California. Under his leadership, Dominguez
became the dominant broker of groundwater rights in Los Angeles County. Additionally,
Dr. Brady led the expansion of Dominguez operations into Sonoma, Marin and Lake
Counties in northern California through the negotiated purchases of private and mutual
water systems.
He is past President of the Board of Directors of the Irvine Ranch Water District (IRWD),
and a former board member of the Orange County Sanitation District (OCSD).
Additionally, he has served as Governor Brown’s appointee to the Colorado River Board
of California.
Dr. Brady is a registered Civil Engineer, and earned his BSE degree in Water Resource
Management from Loyola University of Los Angeles (now Loyola Marymount
University)’s College of Engineering. His MBA, with an emphasis in Finance, is from the
University of Southern California (USC)’s Marshall School of Business. He received his
doctorate degree – an Ed.D with an emphasis in Organizational Leadership – from
Pepperdine University’s Graduate School of Education and Psychology.
RESUME
Brian J. Brady, P.E.
PROFESSIONAL EXPERIENCE
Principal Brian J. Brady & Associates (2000 - present)
Principal of an independent management consulting practice specializing in water
resource assessment, asset valuation (including water rights) and strategic positioning of
both public and private water utilities. Clients have included the Water Replenishment
District of Southern California (WRD), the Inland Empire Utilities Agency, Chevron
Texaco, University of Southern California, California Portland Cement, Vulcan
Materials, Exxon Mobil, Municipal Water District of Orange County, the Central and
West Basin Municipal Water Districts, Borrego Water District, Conaway Preservation
Group and several private water utility investors.
General Manager Fallbrook Public Utilities District (FPUD) (2011- present)
Reporting to a five-member Board of Directors, responsible for operations of the
Fallbrook Public Utility District (FPUD), which provides water, wastewater and
reclamation services to north San Diego County. Partnering with Camp Pendleton Marine
Base to develop critically needed local water supplies (Santa Margarita River
Conjunctive Use Project). Member of the Santa Margarita River Watershed Watermaster
Steering Committee. Represent the District on the Board of Directors of the San Diego
County Water Authority; recently served as the Governor's appointee to the Colorado
River Board of California.
General Manager Imperial Irrigation District (IID) (2008- 2011)
As the appointed CEO by a five-member elected board of directors, provided executive
leadership to the IID electric and water operations within southern California’s Imperial
and Coachella Valleys. Annual operating and capital budgets exceed $850 million, with
a staff of 1,400. Responsible for implementing the landmark Qualification Settlement
Agreement (QSA) among the IID, Metropolitan Water District and the San Diego Water
Authority, and for spearheading major initiatives to develop renewable energy projects.
General Manager Rancho California Water District (RCWD) (2003-2008)
Reporting to a seven-member Board of Directors, was responsible for operations of the
Temecula-based district’s water, wastewater and reclamation divisions. Continued rapid
expansion in the municipal, industrial and agricultural business segments during 2003-
2004 fiscal year resulted in a nearly 14 percent increase in overall system demands. Lead
an aggressive integrated water resources strategy to meet system build out forecasts.
Managed the extraction and recharge operations of the Temecula Valley Groundwater
Aquifer.
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Chairman, CEO Dominguez Services Corporation (1995 - 2000)
As authorized by the Company’s Board of Directors, was responsible for overall
corporate policy, strategy and operations of Dominguez Services Corporation’s utility
and non-utility business units. In the first thirty-six months with the Company, expanded
water utility operations into northern California and increased unregulated water
brokering and subsidiary operations. In the same period, the Company’s market
capitalization rose by more than 250%, and annual shareholder returns averaged 33%. In
November of 1998, completed merger negotiations with California Water Service,
attaining the highest asset valuation of any U.S. investor-owned water or gas utility at
that time.
Assistant General Manager Public Utilities Department, City of Anaheim
(1992-1995)
Directed the operation of the City’s electric utility, gross annual revenues of $250
million. Responsible for electric integrated resource planning, acquisition and
scheduling; demand side management; engineering functions; electric field construction;
environmental services; commercial and industrial business development; and both
electric and water system dispatch operations.
Vice President and General Manager Energy Services Inc. (1988-1992)
Chief Operating Officer of a wholly owned subsidiary of Southern California Edison
Company. Developed and positioned the operation to provide utility related services
(pump/turbine/motor repair, engineering support, cogeneration operating services, utility
R & D technology transfer, fuel oil storage leasing contracts, privatized maintenance
services). Client base developed in the first three years of operation included over 200
companies in the U.S., Canada, Mexico and the Pacific Rim.
Manager, Energy Management Southern California Edison Company
(1983-1988)
Developed and marketed new electric load management programs and electric rate
options to industrial and commercial customers. Partnered with local governmental
agencies in analyzing and economizing energy use. Responsible for developing and
marketing end-use electro-technologies (the forerunner to Edison’s “CTAC”) to assist
industrial and commercial customers in becoming more competitive in the marketplace.
Manager of Valuation Southern California Edison Company (1980-1983)
Manager of department of engineers, accountants, and other technical staff providing
economic, depreciation and cost of service studies; valuations and base data for rate
cases. Served as expert rate case witness before federal and state regulatory
commissions. As the company’s Chief Valuation Engineer, certified to financial
institutions the fair value of company operating assets and real estate for trust indenture
purposes.
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EDUCATION
Bachelor of Science in Engineering (BSE) emphasis: Water Resource Management
- Loyola University of Los Angeles College of Engineering (now Loyola Marymount
University)
Master of Business Administration (MBA), emphasis: Finance
- University of Southern California Marshall School of Business
Doctor of Education (Ed.D), emphasis: Organizational Leadership
- Pepperdine University Graduate School of Education & Psychology
Doctoral research: Skill development for appointed and elected water officials
Additional Graduate level studies:
- Massachusetts Institute of Technology, Stanford University, Western Michigan
University, United States International University
ELECTED AND APPOINTED OFFICES
Board of Directors, San Diego County Water Authority – 2011-present
Board of Directors, Association of California Water Agencies – 2010 – 2011; 2016-
present
Board of Directors , Colorado River Board of California – 2015-2017
Board of Directors, Park Water Company (The Carlyle Group) – 2013-2016
State Legislative Committee, Association of California Water Agencies – 2013-2015
Federal Affairs Committee, Association of California Water Agencies – 2013-2015
Executive Committee, California Transmission Planning Group – 2009-2011
Board of Governers, California Municipal Utilities Association – 2009-2011
Board of Directors, Large Public Power Council – 2008-2011
Board of Directors, Southern California Public Power Authority – 1992-1995; 2008-2011
Board of Directors, Irvine Ranch Water District – 1998-2004
Board of Directors, Orange County Sanitation District – 2001-2004
Board of Directors, National Public Projects Coalition – 2004-2008
Board of Directors, Association of Groundwater Agencies – 2000-2001
Board of Directors, National Association of Water Companies – 1997-2000
Executive Council, California Water Association – 1995-2000
OTHER CREDENTIALS
Registered Civil Engineer, State of California
Member, Phi Delta Kappa (international honor society)
North Fork Water
Company (NFWC)
VALUATION
Shareholders Meeting
January 18, 2018
Valuation Assignment
Summarize the condition of NFWC’s existing system
Characterize and value NFWC’s assets and liabilities (using
three methods)
Determine the current value of NFWC on a per share basis.
Conform to the Uniform Standards of Professional
Appraisal Practice (USPAP)
Important Valuation
Assumptions
Specialty Property –An Ongoing
Utility Business (since 1885).
For purposes of this valuation, it
is assumed the value of real
estate easements is $0
No major construction work is
in progress. All assets are “as-is”
All assets are owned “free and
clear”
Summary of Share Value
Total active shares: 7156
Average annual delivery benefit per share is 0.579 acre-feet
(188,789 gal.)
Net present value (NPV) per share equates to $546
NFWC System
•Eight-mile gravity pipeline (12 to 48 inch dia.)
•Service life depreciation: 40% Functional
depreciation: 25%
•13 active weirs serving 12 shareholders
•Raw Santa Ana River water from Bear Valley
Mutual Water Company
•State Water Project connection (untreated water)
Value of Operating Assets
$4,686,533 (replacement new)
$2,562,278 (total depreciation)
$2,124,255 (depreciated value)
$1,062,128 represents NFWC”s
50% ownership share
Value of NFWC Santa Ana
River Water Rights
Pre-1914 Water rights
Contract deliveries (June-November): 3769 acre-feet
¼ Flow of S.A. Riv. (December-May): 377 acre-feet (approx.)
0.579 acre-feet per NFWC share annual benefit
Substitute Water: State Water Project (SWP)
Reduced quality of S.A. Riv. Water vs. SWP water: 20%
Annual benefit per acre-foot: $100
NFWC Value by Method
Comparable Sales Approach:$4,280,000
Cost Approach (RCNLD):$ 5,818,000
Income Approach: $3,043,000
NFWC Shareholders
Has a right to the annual yield of the North Fork Canal proportionate to
shares held
Must take the water allocation from an approved turnout (weir) on the canal
Can only take delivery a maximum of two times per month
Must take delivery of a minimum of 10 miner’s inches in a 24-hour run
(129,250 gal.)
Shareholders unable to comply with the above forfeit their access to canal water
Each Shareholder:
Delivery Characteristics
Raw water quality highly variable; at times , unusable.
Deliveries must be scheduled. Are not on demand.
Deliveries subject to curtailment based upon hydrology.
Non-pressurized delivery.
Questions
Bear Valley Mutual Water
Company Stock Value
Each share equals .27 miner’s inch
Deliveries From March through November
Some additional deliveries possible
Valued at .106 acre-feet* per year per share
Stock value $101 to $157 per share
* 110% of delivery schedule