Matthew Schenk

> > Mr. Kurtz, > > Please find attached responses to the 11 questions sent by Flint last evening to DWSD. Also, attached are revised exhibits to reflect the proposed change to reserve GOMGD of capacity beginning in year 1 of the prposed contract. > xxxEND_PAGE:treasury01_b04_0379_0503_113 > Please advise if you have any additional questions. We look forward to continue working with Flint on this important issue. > > pe > Matthew Schenk > Chief Operating Officer/ > Chief Compliance Officer > DWSD > City of Detroit > Dave Bing, Mayor > (313) 224-4707 > > xxxEND_PAGE:treasury01_b04_0379_0503_114 DWSD’s responses to Flint’s Questions April 25, 2013 Question 1: How does this proposal conflict with Article 14 (‘Ensuring Equality of Contract Terms”) of the existing contracts, which will result in a re-shuffling of cost and bring Flint/GCDC back to its original costs?. Response: This proposal is fully consistent with Article 14 of the Model Water Contract. Specifically, Article 14 provides that any existing customer can receive the benefit of a future contract provided to a different customer provided that the existing customer assumes all of the new contract terms. In other words, an existing customer cannot select one or two more preferable provisions without accepting the remaining terms that could be viewed as less preferable. DWSD"s proposal to Flint/K WA is unique in several aspects that would likely not be attractive to other existing customers of the system. Most notably, DWSD’s proposal to Flint/K WA not only relieves DWSD of any financial obligation to provide redundancy for water service, but it also requires the customer to maintain its own treatment plant for redundancy. Additionally, the Flint/K WA proposal develops a fixed cost for the customer to guarantee a minimum capacity over the life of the contract. DWSD’s other contracts allow for adjustments both up and down based upon changes in demand, Question 2a: To compare apples to apples, KWA provides 60 mgd capacity. DWSD only provides 40 mgd. Will DWSD require purchase of 60 mgd capacity today or can we purchase 40 mgd today and reserve 20 mgd for later? Is there a premium penalty or no additional cost? Response: The DWSD Proposal provides 60 MGD capacity in a stepped fashion consistent with the specification, providing Flint/GC the ability to adjust for actual growth rather than incur a larger initial obligation. Given the excess capacity in the system, there is little likelihood that capacity would not be available if and when it is needed by Flint/GC. However, Flint/GC may reserve 60 MGD capacity throughout the contract term. The new exhibits attached and dated 4/25/13 have been revised to reflect a contract reservation of 60 MGD throughout the term of the contract and would replace Exhibit 1 and Exhibit 3 previously provided. xxxEND_PAGE:treasury01_b04_0379_0503_115 Even with the reservation of this additional capacity, the total Water Utility Costs through 2042 are only $3,215.04 million, or $908.85 million less than the KWA scenario. This would result in a 37% decrease in rates for Flint in year one from current rates. This relative decrease would grow over the life of the contract. Question 2b: Will DWSD stipulate that our cost cannot be increased due to regionalization? Response: This broad question covers a number of topics. First, DWSD has proposed a contract cost structure that includes fixed charges to the greatest extent possible consistent with State Law. This structure provides significant protection from future rate increases. As was indicated by Mr. Kevyn Orr during our meeting on Friday, April 19, 2013, it is the view of DWSD and the City of Detroit that there will be a strong business case to justify suburban wholesale customers participating in any payment stream to the City of Detroit based on finance cost improvements associated with DWSD becoming a regional authority. Additionally, if Flint participates in the governance structure of the new Authority, it will be part of the deliberative process to agree upon the payment stream. Question 3: DWSD indicated that the current capital improvement plan only includes replacement of one low lift pump. It has also come to our attention that the DWSD is contracting for a new capital improvement plan as of April 24, 2013. Response: DWSD’s CIP is updated annually. On April 24, 2013 the Board of Water Commissioner’s (BOWC) approved a contract for an update to the Water Master Plan. The Water Master Plan is anticipated to provide insight relevant to future CIP’s including asset management strategies that would extend the life of existing assets for the lowest NPV, however, the CIP is a separate and distinct effort. Question 4: How old is the current CIP? Will Flint have input on the CIP? Please provide a better definition of “level of control” as used in your letter. Response: The CIP is updated annually and on a schedule that is timed to run concurrent with development of the Annual Budget. The current CIP was adopted by the BOWC on January 23, 2013. xxxEND_PAGE:treasury01_b04_0379_0503_116 Question 5: What happens if substantial changes occur to the Port Huron Plant/Pipeline for the benefit of other customers? Response: DWSD acknowledges that it is possible that there are investments in the Lake Huron system that might be made solely for the benefit of other customers of the DWSD system. Should investments of this nature be made, their cost would be excluded from the calculation of Flint’s obligations. It is also possible that investments in the Lake Huron system might only benefit the Flint/GC Back up supply. Should this occur, any such adjustment would affect a minor component of the overall costs to Flint. Question 6: Please explain why we are 20% of “other” (meters, outreach etc. — 7.5, 125, 25, 20%, 1.5). Response: The 20% allocation of cost is a flow proportional allocation. Question 7: If Lapeer is not part of the system, are we 100% of pipeline? Response: Yes, if the GLCUA flow is removed from the line, Flint’s flow requirement is 100% of the flow on the section of transmission main west of Imlay City. Question 8: If we are responsible for 100% of the capital of the pipeline and 100% of the operations of the pipeline, why not turn it over to Flint? What would be the sale price? Response: While it is not totally clear to DWSD what the question envisions in terms of the definition of the “pipeline” proposed to be sold to Flint, DWSD has in prior proposals and continues today to be open to discussing the opportunities to sel] infrastructure to Flint/K WA as part of a long-term public/public partnership contractual arrangement. In prior proposals, offers specific to the 72 inch transmission main envisioned such a potential sale subject to more specific negotiations which might include reservation of wheeling rights to DWSD to service additional customers, address issues of competition associated with the use of the asset, etc. xxxEND_PAGE:treasury01_b04_0379_0503_117 While DWSD remains open to discussion, given the nature of the transaction, it is not possible to specify a purchase price or other terms at this time. Question 9: When would this rate become effective, July 1, 2013 or July 1, 2014? Response: The proposal indicates that these rates and charges are available as early as July 1, 2014. Rates and Charges for the FY beginning July 1, 2013 have already been adopted by the Board of Water Commissioners as necessary to meet the system’s overall revenue requirements. Question 10: As part of the discussions on Friday, April 19, 2013, should Flint/GCDC separate from Detroit, would DWSD be willing to enter into a contract extension for water supply during the construction period (3 years)? At what cost or premium would DWSD charge? And what is the basis for that charge? Response: Again, this is a rather difficult question to answer with any specificity. As you may be aware, pursuant to Judge Sean F. Cox’s order of November 4, 2011, the Board of Water Commissioners has full and final authority to approve rates for all suburban customers of DWSD. DWSD would certainly be willing to provide interim service to Flint during the construction phase of KWA on terms and rates as established by the Board of Water Commissioners. To the extent that your question is seeking clarification on the portion of charges that would be attributable to “stranded costs,” I would refer you back to the letter dated April 24, 2013 that I sent to State Treasurer Dillon, with a copy to Ed Kurtz. Please keep in mind that the rates charged during the interim period would be consistent with state law requirements that would prohibit DWSD from charging rates that would generate a “profit” for DWSD. Question 11: Would DWSD be willing to sell the section of pipeline from Imlay to Baxter and Potter if Lapeer also joins KWA? What would the cost be? If DWSD is willing to sell the pipeline, would they be willing to sell water to KWA on a standby basis? If so, what would be the cost? xxxEND_PAGE:treasury01_b04_0379_0503_118 Response: As stated previously, DWSD would be willing to look at opportunities to sell certain sections of pipeline to Flint as part of a public/public partnership arrangement. Should Flint opt to join KWA and no longer be a customer of DWSD, DWSD would still be willing to look at opportunities to sell existing pipeline to Flint, with appropriate reservations of wheeling rights and non-compete clause language. With regards to DWSD’s interest in entering negotiation for potential standby service to KWA, should Flint leave the DWSD system, DWSD has previously indicated that we are open to discussion. Pricing of standby service in this proposal for a public/public partnership is on a significantly discounted basis as reflected in the attached Exhibit 1, page 2. DWSD has not calculated what a standby charge might be as related to the unspecified requirements to another utility. Attachments xxxEND_PAGE:treasury01_b04_0379_0503_119 Page 1 of 2 EXHIBIT 1 Calculation of DWSD Water Rate to KWA Hypothetical FY 2013-14 Rate Structure Annual Avg Unit Rate RevReg't Unit Basis Units Cost Structure {millions) 1 Capital Revenue Requirements $ 7.98 months 12 $ 665,100 per month 2 Operating Revenue Requirements $ 4.40 Mef 1.220 $ 3.61 per Mof 3 Subtotals / Avg Unit Cost $ = 12.38 1220 $ = 10.15 pet Mcf 4 Standby Charge $ 3.32 12 $ 276,900 per month 5 Totals / Avg Unit Cost $ 15.70 1220 $ 12.87 per Mef 6 Total Monthly Charge $ 942,000 per month 7 Total Commodity Rate $ 3.61 per Mef 8 plus: Redundancy Solution (a) $ 8.59 Not a DWSD Cost {a) Redundancy Solution Caleulations 9 Cost of Redundant Line $ 94.68 10 Issuance Expenes, etc. 3 2.18 dl Required Financing $ 96.86 12° Finance Rate 5% 13 Finance Term 25 14 Annual Payment $ 6.87 15 Debt Sve Coverage 125% 16 Annual Revenue Requirement g 8.59 TFce PRELIMINARY THE FOSTER GROUP 4235/3 xxxEND_PAGE:treasury01_b04_0379_0503_120 Page 2 of 2 EXHIBIT 1 Allocation of FY 2013-14 Revenue Requirements Revenue Capacity/ Capacity / Relative Revenus Regt Usage Usage Share Reqt 5 millions mad mgd % $ millions Capital Cost Recovery 1 Treatment - LH WTP 30,35 400 60 15.0% 455 2 Pipeline - LH to Imlay 1.35 440 64 14.5% 0.20 3 Imlay Station 6.85 440 64 14.5% 1.00 4 Pipeline - Imlay to Baxter/Potter 0.74 64 4 100.0% 0.74 5 Other (Meters, Outreach, etc.) 7,50 125 25 20.0% 1.50 6 — Total Capital Cost Recovery 46.79 17.1% 798 Operating Costs 7 ~~ ‘Treatment - LH WTP 15.02 125 25 20.0% 3.00 8 Pipeline - LH to Imlay 0.29 125 25 20.0% 0.06 9 Imlay Station 451 125 25 20.0% 0.90 10 Pipeline - Imlay to Baxter/Potter 0,23 25 25 100.0% 0.23 11 Other (Meters, Outreach, etc.) 1,02 125 25 20.0% 0.20 12 Total Operation and Maintenance 21,07 20.9% 4.40 Annual Revenue Reg't 13. Treatment - LH WTP 45.37 756 14 Pipeline - LH to Imlay 1,64 0.25 15 Imlay Station 11.36 1.90 16 Pipeline - Imlay to Baxter/Potter 0.96 0.96 17 Other (Meters, Outreach, etc.) 8.52 1.70 18 — Subtotal DWSD Revenue Req't 67,87 12,38 Calculation of Standby Charge Total LH System Other 19 Capacity - mgd 1,760 400 1,360 20 Total "Backbone" Capital Costs - $miflions 227.54 46.79 180.75 21 Unit Capital Costs 0.129 0.117 0.133 22 Standby Requirements = Average Day 25 23 Standby Revenue Requirement - $millions 3.32 TFe PRELIMINARY THE FOSTER GROUP 4/25/13 xxxEND_PAGE:treasury01_b04_0379_0503_121 PRELIMINARY EXHIBIT 2 DWSD Water Supply Costs Estimates to Flint Water Supply Costs ($) Option DWSD 4/23/2013 Propesal 328,669,100 DWSD 8 MGD Max Day @ Imlay 634,795,500 KWA (10/31/12 No Overruns, As Provided) * 649,775,200 DWSD 8 MGD Max Day @ Baxter / Poner 672,671,700 KWA-I (10/31/12 No Qverruns with Financing Costs) 707,279,700 DWSD 12 MGD Max Day @ Imlay 725,576,800 DWSD 12 MGD Max Day @ Baxter / Potter 762,110,300 KWA-2 (Treasury Estimate) 766,784,300 DWSD 12 mgd Twin Line Proposal / No blending 818,092,200 DWSD 18 MGD Max Day @ Baxter / Potter 821,226,300 italicized Options as presented in TYJT Report Only reflects estimated WATER SUPPLY Costs. DWSD Water Supply Costs Estimates to Flint /GCDC $ millions Total Water Costs ($) through 2042 DWSD 4/23/2013 Proposal 3,215.04 Estimate of KWA Scenario 4,123.89 Ranking by Cost roy Reflects ALL WATER UTILTY costs, including local Flint / GCDC requirements. 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Mr. Kurtz, Please find attached responses to the 11 questions sent by Flint last evening to DWSD. Also, attached are revised exhibits to reflect the proposed change to reserve 6(0MGD of capacity beginning in year | of the prposed contract. Please advise if you have any additional questions. We look forward to continue working with Flint on this important issue. Matthew Schenk Chief Operating Officer/ Chief Compliance Officer DWSD City of Detroit Dave Bing, Mayor (313) 224-4707 xxxEND_PAGE:deq24_b004_0008_0008_1