To: All Association members

Subject: Guemes Island Water Co.

As most of you will know the Board of this association has been looking into the feasibility of acquiring the Guemes Island Water Co. (GIWC) for the members of this association. To this end we've hired Mr. Mark Spahr, an Island resident and retired PUD manager/Professional Engineer with over 30 years experience in municipal water systems to explore the details of this possible acquisition. Mark's study is enclosed. We've also retained an attorney, Paul Taylor, specializing in water issues and real estate law to guide us through the legal labyrinth of this issue.

Mark's report outlines the status of the GIWC at this moment in time and gives some cautionary advice in several areas; please read and digest his report so we can discuss the pertinent items at the annual meeting. Also, read his item No. 4 - Future Capital Needs as it outlines what we are looking at down the road. This is an expense we will have to bear regardless of ownership.
The other option we've researched is the possibility of GIWC being turned over to the Skagit PUD. In our meeting of February 8th, that many of you attended, we heard Mr. Greg Peterka, PUD managing engineer, outline the PUD strategy for their acquiring the water company if the Skagit Board of Commissioners were to approve of PUD ownership (currently no way of knowing if they are willing to consider this). Their normal procedure would require a time line of roughly three years to asses the infrastructure of the GIWC and determine the costs and improvements involved. This time line and process aren't workable for the GIWC, too lengthy and uncertain for their plans, so Greg said that if the PUD ended up with the facility by default they would in all likelihood establish a contingency fund to cover emergency repairs during the assessment phase and then float a 20 year municipal bond to cover the costs of improvements. For the PUD, improvements mean replacing all delivery pipes (approximately 23,400 ft @ $65 per ft est. = $1,521,000), upgrading the system to service all lots within the Hideaway geographic area, installing iron/manganese filters, new and larger storage facilities, bringing well 5 on line and perhaps even drilling additional wells for the increased capacity needs. The positives in this are: the water system would be first class, we as a community wouldn't have to worry about the quality of the water or it's service. The down side is one of expense and no control over rates or ,even more importantly, the water rights, and the potential for greater development on this end of the island. The issue of water rights in the future will become a key element to growth and cost of living; as the island becomes more densely populated and water becomes even scarcer the costs will rise. If the community owns the water rights and the water company, they control both growth and water rates. We have no way of knowing what the costs of the PUD approach would be and they won't even ball park an estimate until a thorough survey of the system is completed (this would not be undertaken until after they had acquired the company). Be assured, however, that they will not cut corners on quality or costs; the PUD would run this water facility to municipal standards.

The other approach is, of course, for the home owners association to acquire the GIWC. This approach has a number of positives, some negatives and at least one significant hurdle to get over. The upside to this approach is, as indicated in the above paragraph, we control the water rights, rates (to the extent possible) and to a fairly significant degree growth. Our capitol improvements could be managed and self financed through a contingency trust fund and phase implemented on an as needed or as scheduled basis keeping costs under control. As long as we are nongovernment financed we have the option of entering into construction contracts with local people willing to give us cost concessions for on island work. Mark Spahr has agreed to manage and engineer the water company for us at rates well below those of any outside management company. We can reduce billing to every other month thereby cutting the billing costs in half. We can create an on island position for a bookkeeper to do the billings and oversee the accounting functions (this would be a contracted position that would allow someone in the community the opportunity to augment their family income). It appears that our costs would be considerably lower than if PUD were to run the water company.

There is a down side to all of this and it begins with the Association having to maintain an oversight of the water company (this is of course mitigated to a large degree by the hiring of Mark Spahr to manage the operation, at least it puts it on a professional instead of a volunteer basis). The board, as it is currently structured, gradually replaces itself in three year cycles and it may become difficult to find enough people in the community willing, or able, to adequately oversee this business. Most of us are of retirement age or over and simply don't want to devote the time to this kind of endeavor and we aren't getting many qualified younger people moving into the community, so this could be a concern in the long run. Another negative is we're taking an initial gamble (although small) that we can get by over the next three years without any major breaks in the system while our contingency funds build.

The hurdle mentioned earlier is the State Revolving Fund loan to the GIWC of $211,000. If ownership of the GIWC is to be transferred the loan will have to be paid in full or transferred to the new owners. Since the GIWC says they don't have the money to pay off the loan we as Holiday Hideaway Association will have to assume the loan. Since we are already paying the loan with our $5 sur charge our taking on that debt would be primarily a reshuffle of paperwork. The problem, however, comes with the chance that HHA won't qualify for the loan and, in fact, if we do qualify we are then required to put all construction contracts out for bid and pay the prevailing wage to someone probably coming from off island and having to deal with all of those attendant costs. This is a question that will be hard to answer until we apply for the loan (see Mark's report on this item-we should have an answer by the time of the annual meeting). The other way to handle this is to apply for a nongovernment loan from a commercial bank (not necessarily at much higher interest rates, remember we are currently paying 5%). The community properties could be used as collateral (the bylaws and articles of incorporation do allow for this). This approach could get us past the hurdle, but it will take time and a dedicated effort on the part of the board.
We've drawn up a rough budget estimate and it shows that HHA could operate the System within the current rate structure, but we should probably increase the sur charge to cover the required upgrades and thereby avoid having to borrow the money . This is not an exact, but a reasonable estimate based on known past water company expenses and projected fixed operating expenses with realistic maintenance and system upgrading estimates taken into account. Those figures are attached.

The Board has found this to be a complex issue with broad implications for our well being and our property values; the vote you'll be asked to make on this issue is critical and the board hopes that you'll give it due consideration and mark your ballet accordingly. The board has not yet voted to recommend one course over the other, but will make that choice clear at the annual meeting.
We'd also like it to be known that both Carol Terrana and Larry Kirchner, of GIWC, have been extremely helpful throughout this process giving generously of their time and expertise, answering our many questions with patience, grace and sense of common good will and trust. This effort would have been far harder without their help. We've not always seen eye to eye on all points, but the differences have been dealt with in an open and friendly manner and for this heartfelt cooperation we'd like to thank them.


Julie Golding Sharon Schlittenhard Zobra Wambleska