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1 LAKE DURANGO WATER AUTHORITY

BUDGET MESSAGE
2009 BUDGET

The Lake Durango Water Authority (Authority) proposed budget for the calendar year 2009 is
attached. The Authority was formed in December 2007 with the approval of an Establishment
Agreement by Durango West Metropolitan Districts No. 1 and No. 2 (DW1 and DW2) and the
Board of County Commissioners of La Plata County, Colorado. The 2008 Budget was filed
anticipating the Authority would acquire the assets of Lake Durango Water Company, Inc., by
July, 2008, and would take over all operations of the company for half of the calendar year in
2008. There is no financial information for prior years since the first budget year of the
Authority was 2008.

The Authority was formed to acquire, improve and operate the Lake Durango Water System
following a mediation session involving the owner of the Lake Durango Water Company
(LDWC), representatives of the retail customers, DW1 and DW2, the Board of County
Commissioners of La Plata County and staff representatives from the Colorado Public Utilities
Commission. The details of the acquisition are set forth in a Memorandum of Agreement
(MOA) approved by the parties. The acquisition price for the system was negotiated in the
mediation however many other costs associated with improving and operating the system were
not well-known. Since that time, estimates have been received for a portion of the needed
improvements and the Authority has been able to meet with current employees and the owner of
the system to budget for the 2009 calendar year to the best of our ability. The estimates for both
the revenues and expenditures are based on the review of the current company’s records since
2003 also include estimates for much needed system improvements. The Board of Directors of
the Authority anticipates the budget could change and may require the adoption of one or more
supplemental budgets next during the budget year.

The estimated expenses for the operating costs for the Authority were developed following a
careful examination of actual expenditures made by LDWC for the past several years. Since
many LDWC expenditures will not be required or will be substantially reduced as a result of the
public ownership (i.e. PUC regulatory expenses, taxes, insurance) there will be more revenue
available for improved operation of the system. In addition to analyzing the LDWC
expenditures, the budgets for similar sized publicly owned water utilities currently operating in
La Plata County were examined. Finally, input from the staff of DW1 and DW2, which have
each operated publicly owned water systems for more than 30 years, helped fine tune the
estimates. The Authority utilized the services of a CPA experienced with water authorities to
further review the current operational records of the company and the Authority’s budget. The
Board of the Authority believes the estimates of operating expenses may be slightly high but
since this is the first year of actual operations, a general operating contingency of $50,000 has
been included.
The operating expenses were compared with anticipated revenues using current water rates,
based on customer water purchases for the last nine years. At this time, the Authority does not
see a need to adjust the base and per thousand gallons water rates until a formal rate study is
completed. However, overall customer bills will increase to cover the acquisition of the system
assets and water royalty payments to the seller.

The budget proposes a $2,500,000 revenue bond will be issued by the Authority for asset
acquisition. Interest on the bond is estimated at 6% per annum with a 20-year repayment term
which would require debt service of approximately $220,000 per year. As required by the MOA,
the cost for acquisition is assessed equally to all 1,435 taps recognized by LDWC (the
“Committed Taps”) and would require a payment per tap of approximately $13.00 per month
depending on the interest rate obtained on the bond. The budget has estimated revenues at
$15.00 per month per customer for debt service to begin building a reserve for future debt
payments. In addition, as part of the acquisition cost under the MOA, a water royalty of $.45 per
thousand gallons will be assessed by the Authority in 2009 and paid to the current owner of the
system.

A small part of a $500,000 Energy Impact grant will cover the costs of the Authority formation,
due diligence, and PUC proceedings. The bulk of the grant will go to making needed repairs and
improvements to the system. The repairs and improvements were first outlined in the “Operation
and Maintenance Action Plan, December, 2006” prepared by Win Wright of Southwest Hydro-
logic and were updated by Steve Harris of Harris Water Engineering on July 26, 2007 based on
inspection and review of the facilities by Win Wright, Steve Harris and Brett Sherman, La Plata
County Planning Engineer. Since that time, the Authority Board has identified a number of other
needed system improvements with the assistance of the Colorado Water Quality Control
Division, CW Divers, and conversations with LDWC staff and contractors.

The closing date on the acquisition is still uncertain due to the time required to obtain regulatory
approval and complete due diligence, but it will probably occur early in 2009. The 2009 budget
estimates a full year of revenues and expenditures not including costs incurred prior to closing
which are shown as a capital expense. It is possible the budget may reduce accordingly for each
month the Authority does not own the water company.

The Authority will utilize a cash or modified accrual basis of accounting based on professional
advice from a CPA qualified to perform governmental audits. The Authority is not subject to
TABOR since it has no power to levy taxes or hold elections on TABOR issues.

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