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FROM: .Liv-Jeffrey M. Hatch-Miller9"|-Interim DirectorUtilities Division

November 29, 2016DATE:

RE: STAFF REPORT FOR EPCOR WATER ARIZONA INC - APPLICATION TOEXTEND ITS EXISTING CERTIFICATE OF CONVENIENCE ANDNECESSITY FOR ITSMOHAVE WATER DISTRICT SYSTEM (DOCKET no.WS-01303A-16-0350)

Attached is the Staff Report for the Application of EPCOR Water Arizona to extend itsExisting Certificate ofConvenience and Necessity ("CC&N"). Staff is recommending approval withconditions.

JHM: :nr/ML

Originator: Vicki Wallace

Nov 29 2016

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Utility Source, LLC.Docket No. WS-04235A-16-0130

On this 29"' day of November, 2016, the foregoing document was filed with Docket Control as aStaff Report, and copies of the foregoing were mailed on behalf of the Utilities Division to thefollowing who have not consented to email service. On this date or as soon as possible thereafter,the Commission's eDocket program will automatically email a link to the foregoing to the followingwho have consented to email service.

Meghan H. GrabelOSBORN MALEDON, PA2929 Norri Central Ave., 21" FloorPhoenix, Arizona 85012

Ms. Janet WagnerInterim Director, Legal DivisionArizona Corporation Commission1200 West Washington StreetPhoenix, Arizona 85007

Mr. Jeffrey M. Hatch-MillerInterim Director, Udlides DivisionArizona Corporation Commission1200 West Washington StreetPhoenix, Arizona 85007

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Nanisha RossAdministrative Support Specialist

STAFF REPORTUTILITIES DIVISION

ARIZONA CORPORATION COMMISSION

EPCOR WATER ARIZONA INCDOCKET NO WS-01303A-16-0350

APPLICATION TO EXTEND ITSCERTIFICATE OF CONVENIENCE

AND NECESSITY FOR ITS MOHAVE SYSTEM DISTRICT

NOVEMBER 29, 2016

STAFF ACKNOWLEDGMENT

The Staff Report for EPCOR Water Arizona Inc. (Docket No. WS-01303A-16-0350) wasthe responsibility of the Staff members listed below. Vicki Wallace was responsible for the reviewand analyses of the Company's application and preparation of the Division's Staff Report; Jian Liuwas responsible for the engineering and technical analysis; and Brendan Aladi was responsible fordie financial analysis.

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Vicki WallaceExecutive Consultant

Y,jean Liu

Utilities Engineer

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BrendanAladiFinancial Analyst

EXECUTIVE SUMMARYEPCOR WATER ARIZONA

DOCKET no. WS-01303A-16-0350

On September 30, 2016, EPCOR Water Arizona, Inc., ("EPCOR" or "Applicant" or"Company") Filed wide the Arizona Corporation Commission ("ACC" or "Commission") anApplication to Extend its Certificate of Convenience and Necessity ("CC&N") to include AdditionalTerritory in order provide water utility services to Laughlin Ranch in Bullhead City, Arizona.

The application submitted in this docket is requesting the expansion of the Mohave WaterDistrict to allow the Company to provide water service to the entire Laughlin Ranch development inBullhead City, Arizona. The area requested is located adjacent to the Company's existing serviceterritory.

EPCOR is currently certificated to serve Urlits 1 and 2, and is providing water to 352 of the412 Laughlin Ranch homeowners. MH Financial Corporation ("IM") is the present owner of thewater system that serves Unit 3 and the Canyons (currently consisting of 63 existing account holdersthrough an affiliate named LR Water, LLC ("LR Water). Sen/ice through LR Water was intended tobe a temporary water solution for the Laughlin Ranch community as the development grew, andthus, customers were not charged for water. The growth of Laughlin Ranch has now surpassed LRWater's ability to serve, and water service through that entity is no longer viable. LR Water (now LRAsset Management LP pursuant to a sale in December 2015) has requested the transfer of the watersystem and service to EPCOR.

Based on Staffs review and analysis of the application, the plant facilities appear to bereasonable and appropriate. Staff concludes that the Company's existing water system will haveadequate capacity to serve the existing and future customers, including the proposed CC&Nextension area; and it can reasonably be expected that the Company will develop additionalproducion, storage capacity if required in the future. Staff also concluded that the estimated costtotaling $443,195 for the proposed plant facilities appear to be reasonable, and the Company has thefinancial capabilities to provide service to the requested extension area.

Staff recommends the Commission approve EPCOR's application for extension of itsCertificate of Convenience and Necessity to provide water service to the entirety of Laughlin Ranchin Bullhead City, Arizona, subject to compliance with the following conditions:

1. To require EPCOR to charge its existing rates and charges in die proposed extensionarea.

2. To require EPCOR to File with Docket Control, as a compliance item in dies docket,vldthin 18 months of die effective date of an order in this proceeding, a copy of theADEQ-AOC for water facilities needed to serve the requested extension area.

TABLE OF CONTENTSPage

NOTICE AND CUSTOMER INFORMATION

ARIZONA DEPARTMENT OF ENVIRONMENTAL QUALITY (¢¢AI)EQ») COMPLIANCE

5ARIZONA DEPARTMENT OF WATER RESOURCES ( ADWR) COMPLIANCE

ARIZONA CORPORATION COMMISSION

CURTAILMENT AND BACKFLOW PREVENTION

BEST MANAGEMENT PRACTICE (¢cBmpas)

6

EXHIBITS

Engineering 1Maps 2

3Engineering 4Financial and Regulatory Analysis Staff 5

EPCOR Water Arizona, Inc.Docket No. WS-01303A-16-0350Page 1

INTRODUCTION

On September 30, 2016, EPCOR Water Arizona, Inc., ("EPCOR" or "Applicant" or"Company") filed with the Arizona Corporation Commission ("ACC" or "Commission") anApplication to Extend its Certificate of Convenience and Necessity ("CC&N") to include AdditionalTeMtory in order provide water utility services to Laughlin Ranch in Bullhead City, Arizona.

Communication between Staff and EPCOR thus ensued to assure that required informationwas acquired. The Company filed supplemental applications on October 7, October 28, andNovember 9, 2016, providing additional information.

On October 31, 2016 Staff issued its Sufficiently Letter Indicating that the application hadmet the sufficiency requirements of the Arizona Administrative Code ("A.A.C."); however, it waserroneously filed in another EPCOR docket, and such filing was subsequent filed in the correctdocket on November 1, 2016.

The Administrative Law judge ("AL]") issued die initial expedited Procedural Order onNovember 9, 2016. After EPCOR filed a request for further expeditious treatment of thisapplication, the AL] issued a revised Procedural Order setting an expedited hearing date ofDecember 12, 2016, and an expedited Staff Report due date of November 29, 2016.

BACKGROUND

EPCOR is a for-profit corporation and is in good standing with the ACC's CorporationsDivision. EPCOR has 11 water districts in Arizona as follows: Chaparral City Water, Sun CityWater, Sun City West Water, Agua Fria Water, Anthem Water, Mohave Water, Paradise VMeyWater, North Mohave Water, Willow Valley Water, Tubac Water, and Havasu Water. These waterdistricts have a total customer count of 132,712 as of October 31, 2016. EPCOR also has 6wastewater districts with 55,734 customers.

The application submitted in this docket is requesting the expansion of the Mohave WaterDistrict to allow the Company to provide water service to the entire Laughlin Ranch development inBullhead City, Arizona. The area requested is located adjacent to the Company's existing serviceterritory. (See Exhibit 1, Engineering Map).

PROPOSED EXTENSION AREA

The Laughlin Ranch residential development in Bullhead City is comprised of five parcels:Units 1, 2, and 3 at Laughlin Ranch, The Heights at Laughlin Ranch ("The Heights"), and theCanyons at Laughlin Ranch ("the Canyons"). EPCOR is currency certificated to serve Units 1 and2, and is providing water to 352 of the 412 Laughlin Ranch homeowners. MH FinancialCorporation ("MH") is the present owner of the water system that serves Unit 3 and the Canyons(currently consisting of 63 existing account holders through an affiliate named LR Water, LLC ("LRWater). Service dmrough LR Water was intended to be a temporary water solution for the LaughlinRanch community as the development grew, and thus, customers were not charged for water. The


growth of Laughlin Ranch has now surpassed LR Water's ability to serve, and water service throughthat entity is no longer viable. LR Water (now LR Asset Management LP pursuant to a sale inDecember 2015) has requested the transfer of the water system and service to EPCOR. A transferof assets and sales agreement between IM and EPCOR was executed on September 7, 2016.

Additionally, the majority of the owners of the proposed extension area, which consists ofThe Heights (LR 77 Investments LLC), Unit 3 (majority owned by LR Asset Investment LP), andThe Canyons (Lamplight Capital & Asset Management) are also looking for a long-term solution fortheir developments and have requested service from EPCOR. A map of die proposed extensionarea and majority owners is attached as Exhibit 2.

The requested extension area is located entirely within Mohave County and entirely withinthe municipal boundaries of Bullhead City. A copy of the Company's Bullhead City FranchiseAgreement is attached as an exhibit to the application.

The total requested area will add approximately 366 acres to the Company's water CC&Nservice area. The acreage per development is also shown on Exhibit 2.

NOTICE AND CUSTOMER INFORMATION

As indicated in the docketed materials and Staff communications with the Company, alllandowners of record of the proposed extension area have been notified of the proposed CC&Nextension of EPCOR. A majority of the landowners of vacant and/or undeveloped lots/parcelshave requested service from EPCOR. The 63 existing account holders (individual homeowners andcommon areas) of LR Water in the extension area have been contacted on multiple occasions vialetters/notices from LR Water and EPCOR as well as community meetings. The mailings from LRWater not only advised of the proposed transfer of service and reasons for such action, but alsoinvited the current customers to sign and return the letter as a means of requesting water servicefrom EPCOR. As of die date of the Staff Report, EPCOR had received 20 responses from currentcustomers requesting service.

An notice to current customers of LR Water was mailed on September 20, 2016 (SeeExhibit 3) introducing the homeowners to EPCOR and providing information on the upcomingCC&N extension process at the ACC. An Open House was held at the Laughlin Ranch Golf Clubin Bullhead City on November 16, 2016, regarding the transition of water service from LR Water toEPCOR. Approximately 25 people were in attendance, and they were primarily interested in suchissues as: Rates, billing practices; payment options; water quality; outage information, and contactinformation.

There was one opinion filed in the docket expressing opposition to the proposed transferdue to lack of awareness of die temporary nature of water service and concerns about EPCOR andquality of service. He indicated that the Homeowners Association could possibly increase dues inlieu of dissolving the service. EPCOR advised Staff that the Company was informed by theprincipals of LR Water, who currently owns the existing infrastructure, the current customers in theLaughlin Ranch extension area were not currently paying for water service. EPCOR was also


advised that all customers had been informed that provision of free water was intended to betemporary. The Covenants, Conditions, Restrictions & Easements (CCRs) of the Laughlin RanchAssociation ("HOA") do not address whether the provision of water in the development wasintended to be a temporary arrangement or not. The CCRs do give the HOA Board, acting onbehalf of the Association, the right to enter into one or more bulk service agreements with aprovider or providers for water and/or other services. EPCOR customer service personnel spokewide this customer and allayed fears about the Company's service, quality, and cost.

In addition to die notices previously sent, the Company will send another informationalbulletin upon approval of the extension that welcomes die customers, and another communitymeeting will be conducted shortly thereafter.

REQUESTS FOR SERVICE

As indicated above and throughout EPCOR's application, LR 77 Investments, Lamplight,and LR Asset investment LP all have requested water service from the Company in writing. Inaddition, approximately one-third of the current customers of LR water have returned lettersformally requesting service from EPCOR. Outreach efforts will be ongoing. Bullhead City passed aformal Resolution on October 21, 2016 in support of the transfer of water service from LR Water("IM") to the Company. This Resolution was included in EPCOR's Second Supplemental Filing.Bullhead City currency provides wastewater service to the customers in the proposed extension area.

THE WATER SYSTEMS

LR Water is a small isolated water system that exclusively serves approximately 30homeowners in Unit 3, which is a 238-lot residential development adjacent to Units 1 and 2, and 30homeowners in the Canyons. LR Water's production facilities and distribution system are explainedin detail in the Engineering Report, which is attached as Exhibit 4. LR Water has entered into a saleand transfer agreement ("Agreement") with EPCOR which will transfer all production anddistribution water assets to EPCOR.

To serve Laughlin Ranch safely and reliably and reduce the arsenic concentration below theMCL, EPCOR plans to construct a booster pump station and pipeline to the Company's MohaveWater District, Desert Foothills Estate ("DFE") plant. No additional infrastructure is needed at thismc. EPCOR contends that connecting the LR Water System to the Company's Mohave System

would mitigate the arsenic concerns and alleviate the need for in-home filtration systems. Thedetails of the extension plans are explained in the Engineering Report. The Company has estimatedcosts of $443,195 for the construction.

During the first five years, the Company has projected growth to a total of 97 connections.After the initial Eve year period, the projected growth is outlined in a table in Exhibit 4. TheCompany has projected the growth to increase by 12-15 customers in each year.

The Engineering Report has found the plant facilities to be reasonable and appropriate.Staff concludes that the Company's existing water system will have adequate capacity to serve the


existing and future customers, including the proposed CC&N extension area; and it can reasonablybe expected that the Company will develop additional production, storage capacity if required in thefuture.

Staff has reviewed the Company's construction cost totaling $443,195. Staff concludes thatthe estimated cost for the proposed plant facilities is reasonable. The approval of this CC&Nextension application does not imply any particular future treatment for rate base. No "used anduseful" determination of the proposed water plant facilities was made, and no conclusions shoddy beinferred for rate making or rate base purposes.

F IN AN C E OF FACILITIES

The estimated total construction cost of the proposed off-site and on-site facilities is$443,195 as explained in the application and discussed in Exhibit 3 of the Staff Report. EPCORplans to fund the proposed off-site and on-site facilities with $343,195 from Company operatingfunds. No utility financing application is required or necessary for this extension application. Theseller (LR Water, LLC) will contribute $100,000 towards the completion of the transfer.

Financial information submitted by the Company was reviewed by Staff, and a capitalstructure analysis performed. This analysis is included in the Financial and Regulatory Analyst StaffReport, Exhibit 5.

The Company has a balanced capital structure, however, its AIAC and CIAC is 43.21percent in excess of 30 percent AIAC and CL'\C typically recommended by Staff. Further sinceStaff is recommending approval of the extension, it notes that EPCOR should be mindful of itsover-reliance on AIAC and CIAC. Staff recommends that the Company be placed on notice that, tothe extent reasonably possible, it should plan to fund future infrastructure needs with equity andlong-term debt in order to bring more balance to its capital structure mix.

Staff concluded that die Company has the financial capabilities to provide service to therequested extension area.

PROPOSED RATES

EPCOR intends to provide water utility services to die extension area under its authorizedrates and charges. Thus, a customer using 6,800 gallons of water (the average usage of customers inthe Company's Mohave Water District) would pay $27.85 per month at die current Mohave WaterDistrict's rates for residential customers on a 5/8-inch meter.

PUBLIC INTEREST

Staff concludes that based on information received, it is in the public interest to approve thisrequest for an extension of EPCOR's CC8cN extension.

EPCOR Water Arizona, Inc.Docket No. WS-01303A-_6-0350Page 5

ENVIRONMENTALOF QUALITY ("ADEQ")ARIZONA DEPARTMENTCOMPLIANCE

ADEQ reported dirt the DFE drinking water system, PWS No. 08-137, is currentlydelivering water dirt meets water quality standards required by 40 C.F.R. 141 (National PrimaryDrinking Water Regulations) and A.A.C., Title 18, Chapter 4. (ADEQ compliance status reportdated October 4, 2016) .

ADEQ reported that the LR Water drinking water system, PWS No. 08-175, has monitoringand reporting deficiencies. Therefore, ADEQ cannot determine if due water system is currentlydelivering water that meets water quality standards required by 40 C.F.R. 141 (National PrimaryDrinking Water Regulations) and A.A.C., Title 18, Chapter 4 and/or PWS is not in compliance.(ADEQ compliance status report dated November 3, 2016).

The ADEQ Certificate of Approval of Construct ("AOC") for water facilities needed toserve the requested extension area has not been submitted by the Company. Staff recommends thatthe Company docket, as a compliance item in this docket within 18 months of the effective date ofan order in this proceeding, a copy of the ADEQ-AOC for water facilities needed to serve therequested extension area.

ARIZONA DEPARTMENT OF WATER RESOURCES ("ADWR) COMPLIANCE

The Desert Foothill Estates drinking water system service area is not located within anADWR Active Management Area ("AMA"). ADWR's Water Provider Compliance Report, datedOctober 21, 2016, indicate that the DFE drinking water system is currently in compliance withdepartmental requirements governing water providers and/or community water systems.

ARIZONA CORPORATION COMMISSION COMPLIANCE

According to the ACC's Unities Division Compliance Database, there are no delinquentcompliance items for the Company.

CURTAILMENT AND BACKFLOW PREVENTION TARIFFS

The Mohave Water District have approved curtailment and backflow prevention tariffs.

BEST MANAGEMENT PRACTICE (¢¢BMP») TARIFFS

The Mohave Water District has approved BMP Tariffs on file with the ACC.


RECOMMENDATIONS

Staff recommends that die Commission approve EPCOR's application for extension of itsCertificate of Convenience and Necessity to provide water service to the requested area subject tocompliance with the following conditions:

1. To require EPCOR to charge its existing rates and charges in the proposed extensionarea.

2. To require EPCOR to file with Docket Control, as a compliance item in this docket,within 18 months of the effective date of an order in dies proceeding, a copy of theADEQ-AOC for water facilities needed to serve the requested extension area.

EXHIB\T 1

MEMQRANDQM

TO: Vicki WallaceExecutive Consultant IIIUtilities Division

FROM: Lori H. MillerGIS SpecialistUtilities Division

THRU: 02"Del SmithEngineering SupervisorUtilities Division

DATE: November 14, 2016

RE: EPCOR WATER ARIZONA, INC., MOHAVE WATER DISTRICT _APPLICATION FOR EXTENSION OF CC&N (DOCKET NO WS-01303A-16-0350)

AMENDED LEGAL DESCRIPTION

The area requested by EPCOR for an extension has been plotted with no complicationsusing theamended legal description docketed on November 9, 2016 (copy attached).

Also attached is a copy of the map for your files.

/lim

Attachments

cc: Ms. Meghan H. GrabelMs. Deb Person (Hand Carried)Mr. Jian LiuFile

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EPCOR CC&N ANNEXATIONSECTIONS 4 & 9

LEGAL DESCRIPTION

ALL THAT CERTAIN PARCEL OF LAND IN SECTION 9 AND THE SOUTH HALF OFSECTION 4, TOWNSHIP 20 NORTH, RANGE 21 WEST OF THE GILA AND SALTRIVER MERIDLAN, MOHAVE COUNTY, ARIZONA AND MORE PARTICULARLYDESCRIBED AS FOLLOWS:

comm:Encn~1G AT THE SOUTHWEST SECTION CORNER OF SAID SECTION 4 TOWHICH THE SOUTH QUARTER BEARS SOUTH 89 DEGREES 13 MINUTES 37SECONDS EAST AND BEING THE POINT OF BEGINNING;

THENCE ALONG THE WEST LINE OF SECTION 4 NORTH 00 DEGREES 25 MINUTES32 SECONDS EAST, A DISTANCE OF 1387.82 FEET;

TIIENCE DEPARTING SAID SECTION LINE NORTH 52 DEGREES 27 MINUTES 05SECONDS EAST, A DISTANCE OF 63.52 FEET;

TI-IENCE SOUTH 75 DEGREES 35 MINUTES 05 SECONDS EAST, A DISTANCE OF356.40 FEET;


THENCE SOUTH 53 DEGREES 06 MINUTES 47 SECONDS EAST, A DISTANCE OF148.46 FEET;

THENCE NORTH 77 DEGREES 37 MINUTES 27 SECONDS EAST, A DISTANCE OF152.47 FEET;



LN 18949-29-16ENA/DNAPAGE 1 OF 11



9III


THENCE SOUTH 66 DEGREES 45 MINUTES 12 SECONDS EAST, A DISTANCE OF437002 FEET;

THENCE SOUTH 74 DEGREES 45 MINUTES ll SECONDS EAST, A DISTANCE OF673.72 FEET;




THENCE SOUTH 10 DEGREES 53 MINUTES 27 SECONDS EAST, A DISTANCE OF71.59 FEET TO A POINT ON THE SOUTH LINE OF SECTION 4;

THENCE DEPARTING SAID SECTION LINE SOUTH 50 DEGREES 07 MINUTES 04SECONDS EAST, A DISTANCE OF 213.54 FEET;



THENCE SOUTH 89 DEGREES 39 MINUTES 12 SECONDS EAST, ADISTANCE OF242.09 FEET;

LN 18949-29- 16ENA/DNAPAGE 2 OF 11

\1

THENCE SOUTH 00 DEGREES 20 MINUTES 48 SECONDS w18sT, A DISTANCE OF425.07 FEET;

THENCE SOUTH 64 DEGREES 46 MINUTES 53 SECONDS WEST, A DISTANCE OF172.92 FEET;

TI-IENCE NORTH 89 DEGREES 31 MINUTES 29 SECONDS WEST, A DISTANCE OF395. 16 FEET, .

THENCE SOUTH 00 DEGREES 03 MINUTES 37 SECONDS WEST, A DISTANCE OF128.86 FEET;

THENCE SOUTH 89 DEGREES 56 MINUTES 23 SECONDS EAST, A DISTANCE OF136.71 FEET TO A CURVE CONCAVE SOUTHEAST, WITH A RADIAL LINE THATBEARS NORTH 00 DEGREES 03 MINUTES 37 SECONDS EAST, HAVING A RADIUSOF 554.00 FEET;

THENCE ALONG SAID CURVE TO THE RIGHT AN ARC LENGTH OF 194.50 FEET,THROUGH A CENTRAL ANGLE OF 20 DEGREES 06 MINUTES 57 SECONDS TO ACOMPOUND CURVE CONCAVE SOUTHEAST, WITH A RADIAL LINE THAT BEARSNORTH 20 DEGREES 10 MINUTES 34 SECONDS EAST, HAVING A RADIUS OF314.00 FEET;

THENCE ALONG SAID CURVE TO THE RIGHT AN ARC LENGTH OF 24.67 FEET,THROUGH A CENTR.AL ANGLE OF 04 DEGREES 30 MINUTES 07 SECONDS TO ACOMPOUND CURVE CONCAVE NORTHEAST, WITH A RADIAL LINE THAT BEARSSOUTH 24 DEGREES 40 MINUTES 41 SECONDS WEST, HAVMG A RADIUS OF 20.00FEET;

THENCE ALONG SAID CURVE TO THE LEFT AN ARC LENGTH OF 19.35 FEET,THROUGH A CENTRAL ANGLE OF 55 DEGREES 25 MINUTES 11 SECONDS TO ACOMPOUND CURVE CONCAVE SOUTHEAST, WITH A RADIAL LINE THAT BEARSNORTH 30 DEGREES 44 MINUTES 30 SECONDS WEST, HAVING A RADIUS OF 50.00FEET;

LN 1894Rev. 11-08-16ENA/DNAPAGE 3 OF 11

WII

THENCE ALONG SAIDCURVE TO THE RIGHT AN ARC LENGTH OF 33.70 FEET,THROUGH A CENTRAL ANGLE OF 38 DEGREES 37 MINUTES 14 SECONDS TO ACOMPOUND CURVE CONCAVE NORTHEAST, WITH A RADIAL LINE THAT BEARSSOUTH 07 DEGREES 52 MINUTES 43 SECONDS WEST, HAVING A RADIUS OF 20.00FEET;

TH18NCE ALONG SAID CURVE TO THE LEFT AN ARC LENGTH OF 19.89 FEET,THROUGH A CENTRAL ANGLE OF 56 DEGREES 58 MINUTES 22 SECONDS TO ACOMPOUND CURVE CONCAVE SOUTHEAST, WITH A RADIAL LINE THAT BEARSNORTH 49 DEGREES 05 MINUTES 38 SECONDS WEST, HAVING A RADIUS OF294.00 FEET;

THENCE ALONG SAID CURVE TO THE RIGHT AN ARC LENGTH OF 5.51 FEET,THROUGH A CENTRAL ANGLE OF 01 DEGREES 04 MINUTES 24 SECONDS;

THENCE ON A LINE SOUTH 48 DEGREES 01 MINUTES 14 SECONDS EAST, ADISTANCE OF 28.00 FEET TO A CURVE CONCAVE SOUTHWEST, WITH A RADIALLINE THAT BEARS NORTH 48 DEGREES 01 MINUTES 14 SECONDS WEST, HAVINGA RADIUS OF 20.00 FEET;

THENCE ALONG SAID CURVE TO THE LEFT AN ARC LENGTH OF 22.97 FEET,THROUGH A CENTRAL ANGLE OF 65 DEGREES 47 MINUTES 45 SECONDS TO ACOMPOUND CURVE CONCAVE SOUTHEAST, WITH A RADIAL LINE THAT BEARSNORTH 66 DEGREES 11 MINUTES 02 SECONDS EAST, HAVING A RADIUS OP 50.00FEET;

THENCE ALONG SAID CURVE TO THE RIGHT AN ARC LENGTH OF 31 .48 FEET,THROUGH A CENTRAL ANGLE OF 36 DEGREES 04 MINUTES 35 SECONDS TO ACOMPOUND CURVE CONCAVE NORTHEAST, WITH A RADIAL LINE THAT BEARSNORTH 77 DEGREES 44 MINUTES 24 SECONDS WEST, HAVTNG A RADIUS OF 20.00FEET;

THENCE ALONG SAID CURVE TO THE LEFT AN ARC LENGTH OF 18.99 FEET,THROUGH A CENTRAL ANGLE OF 54 DEGREES 24 MINUTES 44 SECONDS;


THENCE ON A LINE SOUTH 42 DEGREES 09 MINUTES 07 SECONDS EAST, ADISTANCE OF 9.67 FEET TO A CURVE CONCAVE SOUTHEAST, WITH A RADIALLINE THAT BEARS NORTH 50 DEGREES 21 MINUTES 50 SECONDS EAST, HAVINGA RADIUS OF 308.00 FEET;

THEN CE ALONG SAID CURVE TO THE RIGHT AN ARC LENGTH OF 366.12 FEET,THROUGH A CENTRAL ANGLE OF 68 DEGREES 06 MINUTES 26 SECONDS;

THENCE ON A LINE SOUTH 28 DEGREES 28 MINUTES 16 SECONDS WEST, ADISTANCE OF 510.72 FEET TO A CURVE CONCAVE SOUTHWEST, WITH A RADIALLINE THAT BEARS SOUTH 61 DEGREES 31 MINUTES 44 SECONDS EAST, HAVINGA RADIUS OF 214.00 FEET;

TI-TENCE ALONG SAID CURVE TO THE RIGHT AN ARC LENGTH OF 113.28 FEET,THROUGH A CENTRAL ANGLE OF 30 DEGREES 19 MINUTES 48 SECONDS ;

THENCE ON A LINE SOUTH 58 DEGREES 48 MINUTES 04 SECONDS WEST, ADISTANCE OF 195.09 FEET TO A CURVE CONCAVE SOUTHWEST, WITH A RADIALLINE THAT BEARS NORTH 31 DEGREES 11 MINUTES 56 SECONDS WEST, HAVINGA RADIUS OF 460.00 FEET;

THENCE ALONG SAID CURVE TO THE LEFT AN ARC LENGTH OF 88.76 FEET,THROUGH A CENTRAL ANGLE OF 11 DEGREES 03 MINUTES 19 SECONDS TO ACOMPOUND CURVE CONCAVE SOUTHWEST, WITH A RADIAL LINE THAT BEARSNORTH 42 DEGREES 15 MINUTES 15 SECONDS WEST, HAVING A RADIUS OF 20.00FEET;

THENCE ALONG SAID CURVE TO THE LEFT AN ARC LENGTH OF 29.67 FEET,THROUGH A CENTR.AL ANGLE OF 85 DEGREES 00 MINUTES 31 SECONDS;

THENCE ON A LINE SOUTH 52 DEGREES 44 MINUTES 35 SECONDS WEST, ADISTANCE OF 84.00 FEET TO A CURVE CONCAVE SOUTHWEST, WITH A RADIALLINE THAT BEARS NORTH 52 DEGREES 44 MINUTES 35 SECONDS EAST, HAVINGA RADIUS OF 608.00 FEET; .


THENCE ALONG SAID CURVE TO THE LEFT AN A.RC LENGTH OF 355.23 FEET,THROUGH A CENTRAL ANGLE OF 33 DEGREES 28 MINUTES 33 SECONDS TO ACOMPOUND CURVE CONCAVE SOUTHWEST, WITH A RADIAL LINE THAT BEARSNORTH 19 DEGREES 16 MINUTES 02 SECONDS EAST, HAVING A RADIUS OF568.00 FEET;

THENCE ALONG SAID CURVE TO THE LEFT AN ARC LENGTH OF 156.03 FEET,THROUGH A CENTRAL ANGLE OF 15 DEGREES 44 MINUTES 20 SECONDS TO ACOMPOUND CURVE CONCAVE SOUTHWEST, WITHA RADIAL LINE THAT BEARSNORTH 03 DEGREES 31 MINUTES 42 SECONDS EAST, HAVING A RADIUS OF968.00 FEET;


THENCE ON A LINE SOUTH 66 DEGREES 39 MINUTES 24 SECONDS WEST, ADISTANCE OF 266.37 FEET TO A CURVE CONCAVE SOUTHWEST, WITH A RADIALLINE THAT BEARS NORTH 23 DEGREES 20 MINUTES 36 SECONDS WEST, HAVINGA RADIUS OF 928.00 FEET;

THENCE ALONG SAID CURVE TO THE LEFT AN ARC LENGTH OF 399.97 FEET,THROUGH A CENTRAL ANGLE OF 24 DEGREES 41 MINUTES 40 SECONDS TO ACOMPOUND CURVE CONCAVE NORTHWEST, WITH A RADIAL LINE THAT BEARSSOUTH 48 DEGREES 02 MINUTES 16 SECONDS EAST, HAVING A RADIUS OF1282.00 FEET;


THENCE ON A LINE NORTH 76 DEGREES 25 MINUTES 23 SECONDS WEST, ADISTANCE OF 925.33 FEET TO A CURVE CONCAVE SOUTHWEST, WITH A R.ADIALLINE THAT BEARS NORTH 13 DEGREES 34 MINUTES 37 SECONDS EAST, HAVINGA RADIUS OF 1758.00 FEET;



THENCE ON A LINE NORTH 89 DEGREES 24 MINUTES 12 SECONDS WEST, ADISTANCE OF 199.85 FEET;

THENCE NORTH 00 DEGREES 35 MINUTES 48 SECONDS EAST, A DISTANCE OF84.00 FEET TO A CURVE CONCAVE NORTHWEST, WITH A RADIAL LINE THATBEARS SOUTH 00 DEGREES 35 MINUTES 48 SECONDS WEST, HAVING A RADIUSoF 50.00 FEET;


THENCE ON A LINE NORTH 00 DEGREES 35 MINUTES 48 SECONDS EAST, ADISTANCE OF 941.56 FEET;

THENCE NORTH 89 DEGREES 24 MINUTES 12 SECONDS WEST, A DISTANCE OF100.00 FEET;

THENCE NORTH 04 DEGREES 30 MINUTES 41 SECONDS EAST, A DISTANCE OF410.42 FEET TO A POINT ON THE WEST LINE OF SECTION 9;

TI-[ENCE ALONG THE WEST LINE OF SECTION 9 SOUTH 00 DEGREES 29 MINUTES14 SECONDS WEST, A DISTANCE OF 117.56 FEET;

THENCE DEPARTING SAID SECTION LINE NORTH 90 DEGREES 00 MINUTES 00SECONDS EAST, A DISTANCE OF 520.00 FEET;



THENCE NORTH 90 DEGREES 00 MINUTES 00 SECONDS WEST, A DISTANCE OF350.00 FEET TO A POINT ON mE WEST LINE OF SECTION 9;

THENCE ALONG THE WEST LINE OF SECTION 9 NORTH 00 DEGREES 29 MINUTES14 SECONDS EAST, A DISTANCE OF 596.35 FEET;


THENCE DEPARTING SAID SECTIONLINE NORTH 49 DEGREES 22 MINUTES 48SECONDS EAST, A DISTANCE OF 53.20 FEET;



THENCE NORTH 46 DEGREES 21 MINUTES 41 SECONDS WEST, A DISTANCE OF50.88 FEET TO A POINT ON THE SOUTH LINE OF SECTION 4;

THENCE ALONG THE SOUTH LINE OF SECTION 4 NORTH 89 DEGREES 13MINUTES 37 SECONDS WEST, A DISTANCE OF 147.75 FEET TO THE POINT OFBEGINNING;

CONTAINING AN AREA OF 365.7 ACRES MORE OR LESS.

LN 18949-29-16ENA/DNAPAGE 8 OF 11

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LN 18940g-2g-16ENA/DNAPAGE 10 OF M

LIL2LELELELEL7LBLEL10L11L12L13L14L15L16L17L18L19L20L21L22L23L24L25L26L27L28L29L30L31L32L33-34L35L36L37L58L39L40L41L42L43L44

N 5227'05" Es 75'35'05" Es 45°25'57" ES 53.06'47" EN 77'37'27" Es 82.32'44" Es 35'33'27" EN 79.33'44" ES 75'15'24" Es 66.45'12" ES 65'30'11" ES 47.42'40" ES 40°21 '32" Es 10.53'27" ES 50°07'04" EN 44'58'03" Es 89°39'12" Es 00°20'48" wS 64°46'53" wN 89.31'29" wS 00.02>'37" ws 89'56'23" Es 48°01'14" ES 28°28'16" ws 5a48'04" ws 52'44._35" wS 86'39'24" wN 89.24'12" wN 00'35'48" EN 00°35'48" EN 89.24'12" wN 04.30'41" ES 00.2Q'14" wN 90oo'oo" EN 27°5o't 2" EN 34'32'27» wN 90'OO'00" wN OO'29'14" EN 49'22'48" EN 65°18'32" EN 05l20'10" wN 46.21'41" wN 89.1;'>'37" wS 42'09'07» E

63.52»356.40'168.64'148.46'152.47'200.70'87.27'107.78'297.58'437.02»213.45'87.4-5'

157.50171 .59'

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I EXHIBIT 3

Epggg WAT€R

EPCORlnTRoou<;lnoImportant Information for Laughlin RanchHomeowners About Your Water Service

As the largest private water provider in Arizona, EPCOR delivers water and wastewaterservice to more than 350,000 people across 22 communities, including over 39,000 peoplein the Bullhead City area. With a focus on safe, reliable and high quality water, and theprotection and careful management of our water resources now and for the future, we'rededicated to the customers and communities we serve.

WHYARE YOU RECEIVINCTHIS NOTICE? WHY IS EPCOR APPLYING TOBECOME LAUGHLIN RANCH'SWATER PROVIDER?LR Water was intended to be a temporarywater service solution for the Laughlin Ranchcommunity. Now that the Laughlin Ranchcommunity has grown, a new water solution isneeded and EPCOR has agreed to become thenew water provider for Laughlin Ranch.

On September 13, 2016 you were sent a letter from yourcurrent water provider, LR Water, LLC ("LR Water")sharing that EPCOR Water Arizona Inc. ("EPCOR" orthe "Applicant") has been asked to become the newwater provider for Laughlin Ranch. As a property ownerserved by LR Water, you're receiving this to provide moreinformation about the application that will be filed with theArizona Corporation Commission ("ACC") and how you canparticipate in the process.

WHATIS EPCORAPPLYINC FOR?Water is a valuable resource. Costs to providewater and water service are increasing asresources are strained, systems age and mustbe maintained repaired and replaced, andfederal and state requirements for safe drinkingwater must be met.

EPCOR has agreed to become the new water serviceprovider for Laughlin Ranch. In order to perform that roleEPCOR must file an application with the ACC requestingapproval to extend EPCOR's existing Certificate ofConvenience and Necessity l"CC&N") bringing LaughlinRanch into EPCOR's current Mohave water district. A CC&Nis authorized by the ACC and grants a utility the exclusiveright and responsibility to provide water services within aspecified area underrates,charges, terms and conditionsestablished by the ACC. A CC&N does not prohibit anindividual from providing services only to themselves usingtheir own facilities on their own property. However, otherapplicable laws may restrict such activity.

It is no longer sustainable for LR Water toprovide that service at no cost to homeowners.EPCOR currently provides service toapproximately 16,000 service connections inthe Mohave water district and has the capitalresources and operational expertise necessary toprovide safe, reliable service. BecauseEPCOR'sMohave water district is adjacent to the LaughlinRanch community we are ideally positionedto serve your community safely and efficiently.LR Water and EPCOR believe that extendingEPCOR's service area to include Laughlin Ranchis the most economical water solution to benefitthe Laughlin Ranch homeowners.

If EPCOR's application is granted, EPCOR will be theexclusive water services provider for the LaughlinRanch community and will be required by the ACC toprovide water service under the rates, charges, termsand conditions established by the Acc for the Mohavewater district. >CONTINUED

I I

I I

WHEN WILLTHEAPPLICATION BE FlL€D?EPCOR expects to file the application with the ACC on or about September 30, 2016.

About Intervention.Where to Find More Information and aCopy of the Application. Arizona state law provides for an open

public process at which, under appropriatecircumstances, interested parties mayintervene. Any person or entity entitled bylaw to intervene and having a direct andsubstantial interest in the matter will be

Once filed, copies of the application will be availableduring regular business hours at the offices of LRWater at 7001 n. Scottsdale Rd, Suite 2050 ScottsdaleArizona 85253, EPCOR at 860 w Gemstone Avenue,Bullhead City Arizona 86442 and 2355 W PinnaclePeak, Suite 300, Phoenix Arizona 85027, the ACC'sDocket Control Center at 1200 W Washington Street,Phoenix, Arizona and 400 West Congress Street, Suite218 Tucson, Arizona, and on the internet at epcor.comand via the ACC website - .azcc.gov - using thee-Docket function .

permitted to intervene. For informationabout requesting intervention, use the"Intervention in Utility Cases" link onthe ACC's website (www.azcc.gov). Youmay also contact the ACC's ConsumerServices Division at 6025424251 or1-800-222-7000.

ADA/Equal Access Information.

The ACC does not discriminate on thebasis of disability in admission to its publicmeetings. Persons with a disability mayrequest a reasonable accommodation suchas a sign language interpreter, as well asrequest this document in an alternativeformat, by contacting the ADA Coordinator,Shaylin Bernal, by email at [email protected] or voice phone number 602-542-3931. Requests should be made as earlyas possible to allow time to arrange theaccommodation.

How to Contact the ArizonaCorporation Commission.

The ACC will hold a hearing on the application and, asa property owner, you may have the right to intervene,and may appear at the hearing to make a statementon your own behalf even if you do not intervenein the process. If you do not intervene, you maynot receive further notice of proceedings for thisapplication. However, all documents related to thisapplication will be available online, usually within24 hours of docketing, at the ACC's website -www.azoc.gov - using the e-Docket function.EPCOR will continue to keep customers informed ofany changes tO their water service.

For the date and time of the hearing, contactthe ACC's Consumer Services Division at802-542-4251 or 1-800-222-7000 in Phoenix or520-628-6550 or 1-800-5350148 in Tucson.

FOR MORE INFORMATION AND QUESTIONS.Property owners in Laughlin Ranch who have questions or concerns about the application who haveobjections to approval of the application or wish to make a statement in support of the application cancontact the Consumer Services Division of the ACC at 602-542-4251 or 1-800-222-7000 in Phoenix or520-628-6550 or 1-800535-0148 in Tucson. You can reach EPCOR at 1-800-383-0834 and LR Water at480.840.8400

I l

EXHIBIT 4

MEMORANDUM


TC): Vicki WallaceExecutive Consultant IIIUtilities Division

FROM: 9 0 4Jean W. LiuUtilities EngineerUtilities Division

RE: Epcor Water Arizona Inc. - Mohave Water DistrictDocket No. WS-01303A-_6-0350 (CC&N Extension)

INTRODUCTION

On September 30, 2016, Epcor Water Arizona Inc. ("Epcor" or "Company") tiled anapplication to extend its Certificate of Convenience and Necessity ("CC&N") governing its Mohavewater district to allow the Company to serve the Laughlin Ranch development, located adjacent tothe Company's existing service territory in Bullhead City, Mohave County, Arizona.

The Company's application met the sufficiency requirements on November 1, 2016. Therequested extension areas will add approximate 366 acres to the Company's water CC&N servicearea in Mohave County, Arizona.

UTILITY PLANT CAPACITIES

Exiffing .P/amf Fa¢i8tie.r

The Company operates its Desert Foothill Estates ("DFE") water system in MohaveCounty, Arizona and its Public Water System ("PWS") No. is 08-137. The Company's requestedextension area will be served by the DFE water system.

The DFE water system consists of two wells - Desert Foodiills Well and Laughlin RanchWell No.1. At the DFE plant and well site, dicrc are two reservoirs with a combined capacity of 1.0million gallons.

Laughlin Ranch Water ("LR Water") is a small isolated water system that exclusively servesLaughlin Ranch Unit 3, which is a 238-lot residential development. LR Water's production facilitiesconsist of a well site wide a single production well and a reservoir site with a 500,000-gallon storagetank and a booster pump station. The well site and reservoir site are separate sites approximately1,900 feet apart. Both sites are located in an undeveloped portion of Section 4, Township 20 NQM,Range 21 West. The production well is connected to the reservoir site via a 6-inch transmission line.LR Water's well capacity is approximately 390 gallons per minute ("GPM"). The well produces

EPCOR Water Arizona, Inc.WS-01303A-16-0350Page 2

water that contains arsenic at concentrations above the maximum contaminant level ("MCL") of 10parts per billion.

Proofed Plant [Qui/itief

To reduce the arsenic concentration below the MCL, Epcor proposes to extend facilitiesfrom its DFE plant to the LR Water system to blend the water down below the MCL. Theproposed improvements will consist of 2,750 linear feet of 6-inch PVC transmission line that willrun from DFH's plant site to LR Water's well site. The new transmission line will tie into theexisting 6-inch transmission line at die LR Water well site. Two new booster pumps are proposedto be installed at the DFH plant to transfer water from the DFE plant to LR Water's storage tank.One booster pump will be the duty pump and the other pump will be the backup pump. Eachpump will have a capacity of 400 GPM.

Pnjecled Gmwl/9

a. D u r i n g t h e f i r s t E v e y e a r s , t h e C o m p a n y h a s p r o j e c t e d g r o w t h t o t o t a l 9 7connec t ions .

b) After the initial 5-year period, the Company is projecting the following growth:

In sonIndustrial_

3 8

Commercial666666666666 0

Res iden t ia l1 0 81 1 91 3 01 4 11 5 21 6 41 7 61 8 82 0 02 1 2

1 5 / e a rS61

Y e a r 6Year 7Year 8Year 9Y e a r 1 0Year 11Year 12Year 13Year 14Year 15Y e a rs 1 6 -Year 39

•

" "M i" "" "I - - IM i" "" "-" "

"

Cort Anaéfxif

T h e Co mp a n y e s t i ma t e d c o s t s o f $ 4 4 3 , 1 9 5 f o r d i e c o n s t r u c t i o n ( s e e At t a c h me n t 1 o f t h i sEn g in e e r i n g M e mo fo r De ta i l s ) .

Conf/u.s2on.r

St a f f h a s r e v i e w e d t h e Co mp a n y ' s P r e l i m i n a r y En g i n e e r i n g Re p o r t a n d f o u n d t h e p l a n tfac i l i t ies to be reasonab le and appropr ia te . Sta f f conc ludes tha t the Company 's exis t ing wa te r sys temw i l l h a v e a d e q u a t e c a p a c i t y t o s e r v e t h e e xi s t i n g a n d f u t u r e c u s t o me r s , i n c l u d i n g t h e p r o p o s e d

EPCOR Water Arizona, Inc.WS-01303A-_ 6-0350Page 3

CC&N extension area, and it can reasonably be expected that the Company will develop additionalproduction, storage capacity if required in the future.

Staff has reviewed the Company's construction cost totaling $443,195. Staff concludes dlatdie estimated cost for the proposed plant facilities is reasonable. The approval of this CC8zNextension application docs not imply any particular future treatment for rate base. No "used anduseful" determination of the proposed water plant facilities was made and no conclusions should beinferred for rate making or rate base purposes.

ENVIRONMENTALOF QUALITY ("ADEQ")ARIZONA DEPARTMENTCOMPLIANCE

Cbmpéance .Ytatuf

Water:

ADEQ reported that the DFE drinking water system, PWS No. 08-137, is currentlydelivering water that meets water quality standards required by 40 C.F.R. 141 (National PrimaryDrinking Water Regulations) and Arizona Administrative Code ("A.A.C."), Title 18, Chapter 4.(ADEQ compliance status report dated October 4, 2016).

ADEQ reported that the LR Water drinking water system, PWS No. 08-175, has monitoringand reporting deficiencies. Therefore, ADEQ cannot determine if the water system is currencydelivering water that meets water quality standards required by 40 C.F.R. 141 (National PrimaryDrinking Water Regulations) and A.A.C., Title 18, Chapter 4 and/or PWS is not in compliance.(ADEQ compliance status report dated November 3, 2016).

Cemfiaate ofApprova/ of Comfmcliorz

The ADEQ Certificate of Approval of Construct ("AOC") for water facilities needed toserve the requested extension area has not been submitted by the Company. Staff recommends thatthe Company docket, as a compliance item in this docket within 18 months of the effective date ofan order in this proceeding, a copy of the ADEQ-AOC for water facilities needed to serve dierequested extension area.

ARIZONA DEPARTMENT OF WATER RESOURCES (CSADWRHI COMPLIANCE

Camp&ance .Sfa1'u.f

The Desert Foothill Estates drinking water system service area is not located within anADWR Active Management Area ("AMA"). ADWR's Water Provider Compliance Report, datedOctober 21, 2016, indicate that the DUE drinking water system is currently ire compliance withdepartmental requirements governing water providers and/or community water systems.

EPCOR Water Arizona, Inc.WS-01303A-16-0350Page 4

ARIZONA CORPORATION COMMISSION (¢¢ACC») COMPLIANCE

A check wide the ACC Utilities Division Compliance Section showed no delinquentcompliance items for the Company. (ACC Compliance Section Email dated November 18, 2016).

CURTAILMENT TARIFF

The Mohave water district has an approved curtailment tariff on file with the Commission.

BACKFLOW PREVENTION TARIFF

The Mohave water district has an approved backflow prevention tariff on file with theCommission.

BEST MANAGEMENT PRACTICE ("BMP") TARIFFS

The Epcor Mohave water district has approved BMP Tariffs on file with the Commission.

SUMMARY

Conclusions

A. Staff concludes that the Company's existing water systems will have adequatecapacity to serve the existing and future customers, including the proposed CC&Nextension areas, and it can reasonably be expected that the Company will developadditional production, storage capacity if required in the future.

B. Staff concludes that the estimated cost for the proposed plant facilities totaling$443,195 is reasonable. The approval of this CC&N extension application does notimply any particular future ueaunent for rate base. No "used and useful"determination of the proposed water plant facilities was made and no conclusionsshould be inferred for rate making or rate base purposes.

c . ADEQ reported that the DUE drinking water system, PWS No. 08-137, is currentlydelivering water dirt meets water quality standards required by 40 C.F.R. 141(National Primary Drinking Water Regulations) and A.A.C., Tide 18, Chapter 4.(ADEQ compliance status report dated October 4, 2016) .

D. The DFE drinking water system service area is not located within an ADWR AMA.ADAR's Water Provider Compliance Report, dated October 21, 2016, indicate dirtthe Desert Foothill Estates drinking water system is currently in compliance withdepartmental requirements governing water providers and/or community watersystems.

EPCOR Water Arizona, Inc.WS-01303A-_6-0350Page 5

E. A check with the ACC Utilities Division Compliance Section showed no delinquentcompliance items for the Company. (ACC Compliance Section Email datedNovember 18, 2016).

Refornmendafionx

A. Staff recommends that the Company docket, as a compliance item in this docketwithin 18 months of the effective date of an order in this proceeding, a copy of theADEQ-AOC for water facilities needed to serve the requested extension area.

Attachment 1

EPCOR Water Arizona Inc.

Estimated Construction CostsLaughlin Ranch Extension

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'$* ' *aJar. ?tiv...:.£Ba.;§"1.=<l.a;.¢. ...s..:1f;.}~..¢;. n.J». :...¢J'i..8L¢»4s:.1L:;...~.l.:-. ..;;".

I l 2750

155

4

2

2

2

3

4

5

7

LF

LF

EA

EA

EA

LS

EA

SF 75

10

1 l

Fumishflnstall 6" C900 PVC

Furnish/Install 6" DIP, restrained

6" Gate Valve, complete

Air Release Valves

Furnish/Install Booster Pumps

Furnish/Install Above Ground Piping

Furnish/Install Flow Meter

Install concrete pad

Electrical

Insurance

Bonds

LS

LS

LS

l l

i n

l l

$57.50

$140.00

$ I ,500.00

$4,560.00

$7,050.00

$34,850.00

$3,700.00

$40.00

$176,600.00

$5,500.00

$10,500.00

Total:

$158,125.00

$21,700.00

$6,000.00

$9,120.00

$14,100.00

$34,850.00

$3,700.00

$3,000.00

$176,600.00

$5,500.00

$10,500.00

$443,195.00

gI

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l

l

Rates\2016 Laughlin Ranch- Mohave Extenslon\Exhibit 6 Construction Cost Estimate.xlsx

1 of 1

9/28/2016l

......_....u...

EXH|B|T 5

MEMORANDUM

TO: Vicki WallaceExecutive Consultant III - Utilities Division

FROM: Brendan AladiPublic Utilities Analyst


RE: EPCOR WATER ARIZONA, INC., APPLICATION FOR AN EXTENSION OPITS CERTIF ICATE O F CO NVENIENCE AND NECESSITY DO CKET NO .WS-01303A-16-0350

INTRODUCTION

On September 30, 2016, EPCOR Water Arizona, Inc. ("EPCOR" or "Company') tiled anapplication with the Arizona Corporation Commission ("Commission") for an extension of itsCertificate of Convenience and Necessity ("CC&N") governing its Mohave water district system toallow the Company to serve the Laughlin Ranch development, located adjacent to the Company'sexisting service territory in Bullhead City.

FINANCIAL CAPABILITY TO PRO VIDE REQ UESTED SERVICES

According to the application, the Company plans to fund the construction of $443,195 waterfacility and the proposed off-site and on-site facilities with $343,195 from Company operating fundsand $100,000 with Contribution in aid of construction ("CIAC").

Pursuant to the provisions of Arizona Administrative Code ("A.A.C.") §R-14-2-602(B) (5) (n)through R-14-2-602(B) (5)(s), the Company's application support is to include discussions anddescriptions of planned facility investments and revenue and expense estimates. The Companyprovided projections of its annual revenues and expenses for the first five years following theapproval of the application and estimates of the value of its utility plant in service at the end of eachof the first Eve years following the approval of the Application. The Company projects an operatingincome for each of the years is as follows: Year 1, $24,301,167; Year 2, $24,302,433; Year 3,$24,303,699; Year 4, $24,304,955; and Year 5, $24,306,211.

EPCOR provided its unaudited balance sheet and income statement for die year endedDecember 31, 2015. These financial statements reported total assets of approximately $733.9million, total liabilities of approximately $556.0 million, and total equity of $177.9 million.

Based upon a review of the linancid statements provided, Staff found that EPCOR had apositive cash flow of $49,787,000 during this financial reporting period (i.e., $24,287,412 operatingincome + ($18,623,845 + 6,875,743) in depreciation expense) which is sufficient to EPCOR'soperational needs and to provide water and wastewater service in the requested CC&N service area.


CAPITAL STRUCTURE AND FINANCIAL SOUNDNESS

Utility capital structure is an indicator of financial soundness. Undercapitalized investorowned utilities may result in rate bases that are negative or too small to be used to establish ratesthat are sufficient to generate enough revenue to pay for operating expenses and fund capitalimprovements without giving consideration to operating margins or extraordinary high rates ofreturn to drive the revenue requirement model results.

Financial soundness or the risk that a company is not able to meet its legitimate financialobligations when they are due (e.g. operating expenses) is one of the concerns that the Commissionidentified regarding undercapitalized companies. These undercapitalized companies often haverelatively small amounts of equity as compared to AIAC and CIAC funding plant. Accordingly,Staff has determined Mat a financially sound utility company, on average, should have no more than30 percent AIAC and/or CIAC in its capital structure.

The pro forma effect of EPCOR funding the $343,195 plant expansion with its proposedlevels of equity and $100,000 CIAC would result in a sound capital structure comprised of 43.22percent AIAC/CIAC, 24.15 percent equity, and 32.64 percent debt as shown in the table below.

Ca ital Structure Inclusive of AIAC and CIACPro FormaWastewater

PlantPro

FormaWaterPlant

AIACCIAC

80SQ$100,000

%23.34%19 .88%43.22%

0/023.34%19.89%43.23%

12/30/2015$172,194,107$146,758,317$318,952,424

Adjusted12/30/2015$172,194,107$146,858,317$319,052,424

24.15%24.11°/o $ $0343,195 $178,253,311$177,910,116138132.64%32.64°/o M

100.00%100.00%Total8240,920.843$738,226,578

39$ 443,195

$ 240,920,843$737,783,383

_ - - _ _ _ -_ - - _ _ _ -Etan!

The Company has a balanced capital structure, however its AIAC and CIAC is 43.22 percentand in excess of 30 percent AIAC and CIAC typically recommended by Staff. Further, since thefinancial Staff is approving the extension, it notes that EPCOR should be mindful of its over-reliance on AIAC and CIAC. Staff recommends that the Company be placed on notice that, to theextent reasonably possible, it should plan to fmmd future infrastructure needs with equity and long-term debt in order to bring more balance to its capital structure mix.

EPCOR Water Arizona, Inc .Docket No. WS-01303A-16-0350Page 3

Staff concludes that die Company has financial capabili t ies to provide service to therequested extension area.

RECOMMENDATIONS

Staff recommends:

1. Approval of EPCOR's CC&N extension.

2. That EPCOR charge currently authorized tariff rates and charges for water servicefor the Mohave water district system approved in Decision No. 73145.

3. The Company should be placed on notice that, to the extent possible, it should planto fund future infrastructure needs with equity and long-term debt in order to bringmore balance to its capital structure mix.

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