Carmel Area Wastewater District/Pebble Beach Community Services District

Pebble Beach Company

WASTEWATER RECLAMATION PROJECT

MANAGEMENT COMMITTEE

MINUTES

Meeting of May 20, 2005

Pebble Beach Community Services District Boardroom

3101 Forest Lake Road, Pebble Beach, CA

1. Call to Order

Richard Andrews, PBCSD General Manager, serving as facilitator, called the meeting to order at 9:43 a.m. All members or alternates were present, including: Joyce S. Stevens and Charlotte F. Townsend, Carmel Area Wastewater District Board of Directors (CAWD); Gary D. Hornbuckle and Richard D. Verbanec, Pebble Beach Community Services District Board of Directors (PBCSD); and Mark Stilwell, Executive Vice President, Pebble Beach Company (PBCo).

Others in attendance:

David Berger, General Manager, Monterey Peninsula Water Management District (“MPWMD”)

Kenneth Buchert, Associate Legal Counsel, CAWD/PBCSD

Ray von Dohren, P.E., General Manager, CAWD

Barbara Buikema, Accountant/Controller, CAWD

Michael Niccum, P.E., District Engineer, PBCSD

Tom Peterson, Operations Supervisor, California-American Water Company (“Cal-Am”)

2. Visitors, public comment and/or changes to the agenda:

There were no comments from visitors, and no changes to the agenda were requested.

3. Minutes:

There were no corrections suggested to the Minutes of the Reclamation Management Committee meeting held on March 18, 2005.

It was moved by Mark Stilwell, seconded by Gary Hornbuckle and unanimously carried, to approve the minutes of the Reclamation Management Committee meeting held on March 18, 2005, as submitted.

4. Operations & Maintenance of the Project:

4-A. Treatment Plant Operations & Maintenance (“O&M”)

The Committee received a written report from CAWD Treatment Plant Superintendent, Mark Scheiter, dated May 16, 2005 regarding treatment plant operations for the period of March and April 2005. It was reported that during the report period the most significant activity had involved the treatment plant staff’s extensive work with representatives of the U.S. Filter Company in the operation and testing of the Micro-Filter/Reverse Osmosis (“MF/RO”) Pilot Plant.

CAWD General Manager, Ray von Dohren indicated that he had no supplemental comments to make regarding the submitted written report. There were no questions or comments from Committee members.

The written report regarding Treatment Plant O & M for March and April 2005 was received for information purposes and no action was required or taken by the Committee.

4-B. Distribution System O&M

PBCSD District Engineer, Michael Niccum, reviewed his written Distribution System Operations Report, dated May 20, 2005. Mr. Niccum indicated that the distribution system had operated normally and that all required maintenance had been performed. He reported that total water demand for the water year (October 1 to September 30) to date was 31% below the 10-year average usage of 334 acre-feet and potable water backup usage was 56% lower than the 10-year average of 94 acre-feet for the same period. Mr. Niccum said that due to prevailing wet weather the April potable water flushing cycle had been postponed to May when about 29 acre-feet was used for the flushing cycle. He noted that charts were attached to the written report which included reclaimed and potable water used on a daily basis for the report period as well as monthly usage for the 2004-05 water year and previous ten water years. There were no questions or comments from Committee members.

The Distribution System O & M Report for March, April and May 2005 was received for information and no action was required or taken by the Committee.

4-C. Operation and Maintenance Financial Reports

Ms. Buikema reviewed her submitted financial statements for the period from July 2004 through January 2005. She noted that recently CAWD had transferred its reclamation project banking from Monterey County to First National Bank, which she believed will allow timelier processing of project checks. She also clarified the statements submitted to the Management Committee covered the same period as the report that had been presented to the Committee on March 18, which had been limited to operating expense data. Ms. Buikema said the MPWMD had recently provided revenue data that allowed her to prepare comprehensive financial statements for the July 2004 to January 5, 2005 period. She reported that on January 31, 2005 there was a balance of $378,299 in the Operation & Maintenance (“O&M”) Account, but that the actual balance in the County O&M account as of May 20, 2005 was $258,253. Ms. Buikema indicated that she had no further supplemental oral comments to offer regarding the financial statements and would respond to any questions the Committee members may have.

In response to Joyce Stevens’ questions concerning the effect of Cal-Am Water Company (“Cal-Am”) general rate increases on the reclamation project, Ms. Buikema confirmed that the most recent proposed domestic water rate increases would also require increasing recycled water prices to the same level, and that the proposed rate increases could mitigate some reclamation project cash flow issues. In response to Mark Stilwell’s question, she confirmed the MPWMD had made progress in submitting more current revenue data for the project, but still needs to provide revenue information for the months of February and March, 2005 in order to allow her to prepare complete financial statements for the most recent quarter of the fiscal year. David Berger, MPWMD General Manager, indicated that the District’s staff was hopeful that it would be able to complete its reconciliation of the Reclamation Project balance sheet prior to the Management Committee’s next meeting. There were no further questions or comments from Committee members.

It was moved by Joyce Stevens, seconded by Charlotte Townsend, and unanimously carried that the Financial Statements for the period of July 1, 2004 through January 31, 2005 be accepted as submitted.

5. Status reports concerning Phase II (Expanded) Reclamation Project:

5-A. Advanced treatment facilities:

General Manager von Dohren reported orally regarding the status of planning for the advanced treatment plant component of the Expanded Reclamation Project, which will include micro-filtration and reverse osmosis facilities (“MF/RO”). He said that the pilot MF/RO plant was continuing to operate and that data was being collected and analyzed. However, he indicated the PBCo had recently advised CAWD to discontinue further engineering on the full MF/RO facilities, as the project cost estimate had escalated significantly above earlier estimates used for pricing the total costs of the Expanded Reclamation Project. He said that PBCo had advised CAWD that it is reviewing the current estimate and will attempt to determine a course of action as soon as possible. Mr. von Dohren said that he had no further information or comments to make at this time.

Mr. Stilwell advised Committee members that PBCo made its decision to suspend current engineering services on the MF/RO facilities because the latest cost estimate had increased more than 50% over the original estimate used for project financial planning purposes. He said that PBCo is evaluating reasons for the increase and trying to determine how or if it may be possible to reduce project costs to the level originally contemplated in the financial plan. Mr. Stilwell indicated that PBCo is reviewing the matter with the project engineer as well as with other consultants.

Gary Hornbuckle asked if the critical elements of the cost escalation had been identified. Mr. Stilwell responded that while PBCo had not yet completed its review, preliminarily it appeared that additional components relating to treatment plant secondary system nitrification process that would be required for the efficient operation of the MF/RO facilities would add about $2.5 million to the total project costs; changes in number of MF and/or RO units, and sizing of the MF/RO facilities increased costs perhaps between $1.0 and $2.0 million and that beyond these two factors PBCo had not yet determined what else resulted in the apparent increase. He noted that in October 2005, based on information provided by the project engineers, a total cost estimate of $12.0 million had been established for the project financing plan. He said the estimate included a $1.0 million project contingency fund. Mr. Stilwell said at this time PBCo is trying to come to grips with the issue of whether the MF/RO facilities will really cost $20.0 million, the amount of the most recent cost estimate, or $12.0 million, the amount originally estimated. He said everyone involved is working diligently to complete the reassessment, and that his senior management continue to remind him that the cost estimate for the total Expanded Reclamation Project, including Forest Lake Reservoir and Advanced Treatment, used to be $15.0 million.

Joyce Stevens inquired whether the timeline for completion of the advanced treatment facilities would be affected by the current suspension of engineering design tasks. Mr. Stilwell responded that PBCo had been hopeful the facilities could be in operation for the 2007 irrigation season, but that consideration was now secondary to resolving the apparent project budget issue. In response to Rick Verbanec’s question, Mr. Stilwell said he did not believe there would be any opportunities for cost savings by delaying construction or use of Forest Lake Reservoir. Discussion ensued, in which it was concluded that even without the availability of advanced treated water Forest Lake Reservoir would provide certain important benefits to the reclamation project and the community by allowing the project to meet irrigation requirements during peak periods and enable the tertiary treatment facilities to be operated and maintained more efficiently. It was also concluded that the delay in bringing advanced treatment facilities to fruition would have no impact on the design of Forest Lake Reservoir. The only operational impact that may be expected is greater use of the treatment plant at the reservoir to remove algae from tertiary treated water, as the higher nutrient content in the tertiary treated water may promote more algal growth.

In response to David Berger’s question, Mr. von Dohren said that value engineering at the current stage of advanced treatment facilities design would not be feasible, as the work had not yet even reached a 20% design stage. Mr. Berger concurred, and indicated that in his experience it appeared that it was too early in the project engineering for the construction cost estimate to be reliable, and that at least 30% of the design should be completed before value engineering would be helpful. Mr. von Dohren said that from CAWD’s perspective the engineers still need to identify project configuration and components that can be operated and maintained in the most cost effective manner. He said that until CAWD is satisfied that the proposed advanced treatment facilities design configuration will be compatible in the cost effective operation and maintenance of the rest of the existing treatment plant they will not be able to refine the advanced treatment facilities project cost estimate.

Mr. Verbanec questioned why issues with design and cost estimating were not foreseen. He asked what fundamentally is different in the advanced treatment project planned at CAWD than other places in the world where the technology has been established. Mr. von Dohren said there probably is not much difference in the application of the technology locally, and that the main underlying reason for increased cost estimate is that there may have been a misunderstanding between CAWD and the PBCo as to their roles and responsibilities in developing the project. Mr. Stilwell said that from PBCo’s perspective it is re-evaluating whether to keep the same project team, then complete further project planning sufficient to be able to do value engineering in order to develop a more reliable project cost estimate. Ms. Stevens remarked that based on her own project development experience as an architect that design is a dynamic process, and that it is not unusual for initial cost estimates to change as the design progresses.

As to financing, Mr. Stilwell indicated that, if necessary, PBCo does have options for alternative funding, one of which would be to sell more water rights. In response to Ms. Stevens’ questions, Mr. Stilwell said the maximum potential amount of potable water rights PBCo could sell would be 175 acre feet. He said that about 85 acre feet had been sold to date within the Del Monte Forest, and the state will also allow PBCo to sell water rights to residential property owners outside of the Forest. However, the situation with MPWMD would be problematical, as the District might have to conduct further environmental review and hold hearings before authorizing water sales outside of Pebble Beach.

Gary Hornbuckle asked how long it would take to get an answer regarding the resumption of work on the advance treatment project. Mr. Stilwell responded that PBCo was hopeful planning could resume within 30 days, possibly less if there is no new direction regarding the composition of the project team or design parameters of the project. He said PBCo was assuming responsibility to assist in resolving the current issues relating to direction and design of the project.

There were no further questions, comments or action taken by the Committee.

5-B. Forest Lake Reservoir:

PBCSD District Engineer Michael Niccum reviewed his written report, dated May 20, 2005 regarding the status of construction of the Forest Lake Reservoir component of the Expanded Reclamation Project. With the aid of slides depicting various construction activities, Mr. Niccum reported that Anderson Pacific Engineering Construction had made good progress on the project. The contractor has mobilized, completed clearing and grubbing operations, commenced rough grading of the reservoir interior, and started excavating for the backwash structure of the treatment plant. He said the Division of Safety of Dams (“DSOD”) of the State Department of Water Resources indicated concern at a preconstruction meeting on April 14 about a number of changes that had been made to the construction plans approved by DSOD in 2001. Mr. Niccum said that based on PBCSD staff’s meeting with DSOD in Sacramento on April 25 DSOD advised it would complete its review of revisions within 6 to 8 weeks. In the meantime, he said DSOD had provided initial direction on all items on the critical path schedule. Mr. Niccum then reviewed the construction schedule attached to his written report and responded to questions from the Committee as to the interpretation of the schedule. Mr. Verbanec suggested that it would be helpful if the same type of construction schedule was provided to the Committee when the advanced treatment project was ready to be constructed.

Mr. Niccum noted that to date the contractor had earned 12% of the $10.9 million construction contract.

There were no further questions, comments or action taken by the Committee.

5-C. Implementing of Financial Plan

The Committee received and reviewed copies of two principle documents that were utilized by the PBCo in its sale and transfer of potable water rights to Pebble Beach property owners. One document was the assignment by PBCo of a portion of its water entitlement and water use permit granted to PBCo pursuant to MPWMD Ordinance No. 39. The other document was a comprehensive disclosure report provided to each purchaser of PBCo water entitlement. Mr. Stilwell answered questions from the Committee regarding the documents and reported on the progress of water sales. He said about $16.0 million worth of water sales closed escrow in April, $1.75 million would close at the end of May and an additional $300,000 to $400,000 of water sales would close in June. Mr. Stilwell said the title company was charging a $100 fee on each transaction and that $17,000 in transfer fees had been paid to Monterey County. He also noted that about 30 acre feet of water rights remained for sale out of the original 120-acre feet PBCo had earmarked to finance the expanded reclamation project. And, he reported that between 10 and 20 property owners elected not to close escrow because of the question raised by attorney Rosenthal regarding possible applicability of the “Robles del Rio Agreement” to the MPWMD’s approval of the PBCo water sales.

David Berger estimated that more than 40 of the purchasers of PBCo water rights had already filed their water management plans with MPWMD, including payment of water use fees and water release (connection) charges.

In response to Ms. Stevens’ question, Mr. Stilwell advised that the form of disclosure report provided to the Committee for its review had been provided to all purchasers in the package of escrow documents that were reviewed and executed by them at close of escrow.

There were no further questions, comments or action taken by the Committee.

6. Miscellaneous Information or Announcements from Members, Staff or Visitors:

There were no miscellaneous reports or announcements.

7. Closed Session

The Committee did not meet in a closed session.

8. Adjournment & Next Meeting Date:

There being no further business at 10:50 a.m., it was moved by Joyce Stevens, seconded by Charlotte Townsend, and unanimously carried to adjourn to the Committee’s next regular meeting on Friday, July 1, 2005 at 9:30 a.m. in the PBCSD Boardroom at 3101 Forest Lake Road, Pebble Beach. (Note: due to conflicts with personal schedules, the meeting date was subsequently changed to July 8, 2005.)

Respectfully submitted:

Richard Andrews

Secretary to the Committee