1. Municipal & Financial Services Group Water and Sewer Rate Study Revenue Requirements and Rates Workshop April 18, 2012 King George County Service Authority Presented by: Edward Donahue Eric Callocchia

2. Contents 2  Objectives  Revenue Requirements  Rate Projections  Recommendations

3. Objectives - Why Review Water and Sewer Rates? 3 To ensure that rates and fees are stable through sound financial management at a level that fully recovers the costs of providing services and appropriately allocates costs to customers. To Meet Objective: Review current water and sewer rate structures and revenue adequacy Design and analyze an alternative three tiered water structure as well as a cap on non-winter sewer use. Tier 1: Small Users Tier 2: Average Users Tier 3: Excessive Users Separate costs between user rates and capital fees (availability fees) to ensure the proper cost allocation

4. Revenue Requirements 4

5. O&M Expenses – Future Forecasts Escalation factors for projecting future expenses based on the following: Actual FY 2010-2011 customer information Most recent full fiscal year of information Budgeted FY 2011-2012 O&M Expenses Actual existing debt schedule County’s 5 year CIP Personnel expenses projected based on a combination of indices. Current assumption is 3% increase per year throughout the projection period 5

6. Operating and Maintenance Expenses 6 Current FY2011-2012 Operating and Maintenance Budget Total Budget = $2.96 million

7. in millionsFY 12FY 13FY 14FY 15FY 16FY 17 Water $0.74$0.73$0.76$0.80$0.83$0.85 Sewer $1.51$1.49$1.54$1.59$1.63$1.68 Water Maint. $0.40$0.39$0.40$0.42$0.43$0.44 Sewer Maint. $0.31$0.40$0.41$0.42$0.43$0.45 % Change 1.9%3.4%3.6%3.0% O&M Expenses Forecast 7

8. Existing Debt Service Payments (in millions) 8

9. Capital Improvement Projects – Water Fund 9 ProjectsFY 12FY 13FY 14FY 15 Generator Upgrade Project$32,500$225,000 St. Pauls Storage and SCADA Upgrades$30,000$150,000 Peppermill Water Storage and Interconnect Upgrades$50,000$175,000$125,000 Presidential Lakes Arnolds Corner Interconnect & Controls Upgrade $125,000 Fairview Beach/Potomac Landing Well Replacement Project $640,000 Indiantown Well Improvement Project$100,000$650,000 Route 206 Water Improvement Project$200,000$2,000,000 Fairview Beach Water Tank$940,000 Total Annual CIP Spending$1,735,000$232,500$700,000$2,775,000 Projects are funded by a combination of cash, borrowing and availability fees

10. Capital Improvement Projects – Sewer Fund 10 ProjectsFY 12FY 13FY 14FY 15 Generator Upgrade Project$32,500$225,000 Bayberry Gravity Sewer Replacement$80,000$40,000 Fairview Beach WWTP Effluent Filter Project$800,000 Purkins Corner to Hopyard Force Main & Pump Station Project $175,000$787,500 Oakland Park to Hopyard Force Main & Pump Station Project $200,000$1,650,000 Total Annual CIP Spending$80,000$1,247,500$2,662,500$787,500 Projects are funded by a combination of cash, borrowing and availability fees

11. Operating & Maintenance Reserve 11 Serves as working capital. Industry Practice is to maintain 90 days of annual operating expenses for fund (25% of annual O&M) - typically required by Virginia SCC for investor-owned utilities. Current Cash and Cash equivalents exceeds the target balance for the entire planning period in each fund, so no further contribution is currently recommended for either the water or sewer operating reserve.

12. Repair, Replacement & Rehabilitation Reserve (“3R”) 12 ► What Should We Spend? Book Value Estimated useful life and approximate age ► What Are We Spending? Repair and replacement projects from the capital budget ► What is the Required Contribution to Make Up the Difference? Difference between annual spending and annual required reinvestment Revenue raised through current user fees, not future borrowing

13. Repair, Replacement & Rehabilitation Reserve (“3R”) - Preliminary Results 13 in millionsFY 12FY 13FY 14FY 15FY 16FY 17 Sewer $0.00 $0.10 in millionsFY 12FY 13FY 14FY 15FY 16FY 17 Water $0.00 $0.03$0.07$0.10

14. Revenue Requirements – Water Fund (millions)FY 12FY 13FY 14FY 15FY 16 Operating Costs Total Operating Expenses $1.14$1.12$1.16$1.22$1.25 Operating Reserve Contribution $ - Total Operating Expenses $1.14$1.12$1.16$1.22$1.25 Capital Costs Existing Debt Service Payments $0.11$0.12 $0.15$0.17 Cash Funded Capital Projects $0.03 $0.10$0.13$ - Projected Debt Service Expense $ -$0.11 3R Reserve $ - $0.03$0.07$0.10 Total Capital Expenses $0.14$0.26$0.37$0.45$0.38 Total Revenue Requirement $1.28$1.38$1.53$1.67$1.63 Less Miscellaneous Other Revenues $0.09$0.05 $0.06 Net Revenue Requirement from User Rates $1.19$1.33$1.47$1.61$1.57 14 Numbers may not add due to rounding.

15. Revenue Requirements – Sewer Fund (millions)FY 12FY 13FY 14FY 15FY 16 Operating Costs Total Operating Expenses $1.82$1.89$1.95$2.01$2.07 Operating Reserve Contribution $ - Total Operating Expenses $1.82$1.89$1.95$2.01$2.07 Capital Costs Existing Debt Service Payments $0.18$0.19 $0.26$0.27 Cash Funded Capital Projects $ -$0.03$ - Projected Debt Service Expense $ -$0.07 3R Reserve $ - $0.10 Total Capital Expenses $0.18$0.29$0.36$0.43$0.44 Total Revenue Requirement $2.00$2.18$2.31$2.43$2.51 Less Miscellaneous Other Revenues $0.08$0.06 $0.07 Net Revenue Requirement from User Rates $1.91$2.11$2.25$2.37$2.45 15 Numbers may not add due to rounding.

16. Financial Conditions with Current Rates Water Fund (millions)FY 12FY 13FY 14FY 15FY 16 Net Revenue Requirement $1.19$1.33$1.47$1.61$1.57 Revenues under Current Rates/Customer Base $1.36$1.43 Surplus / (Shortfall) $0.17$0.10($0.05)($0.18)($0.15) Annual Breakeven Revenue Increase N/A 3%13%10% 16 Sewer Fund (millions)FY 12FY 13FY 14FY 15FY 16 Net Revenue Requirement $1.91$2.11$2.25$2.37$2.45 Revenues under Current Rates/Customer Base $1.63$1.79 Surplus / (Shortfall) ($0.29)($0.33)($0.46)($0.58)($0.66) Annual Breakeven Revenue Increase 18% 26%33%37% Numbers may not add due to rounding. FY12 and FY13 numbers include the budgeted rate increases: 5% water, 10% sewer

17. Revenue Requirement Conclusions  Current Water Fund User charges recover costs associated with current expenditures, but will need adjustment in the coming years in order to maintain a self-funding water system.  Average residential water use (year round) ~ 5,000 gallons per month  About 90% of residential water bills are for less than 10,000 gallons per month  Current Sewer Fund User charges do not recover costs associated with current expenditures. Significant revenue adjustments will be necessary in the coming years in order to maintain a self-funding sewer system.  Average residential user’s summer water use is about 30% higher than winter usage. 17

18. Financial Plan and Rate Recommendation 18 FY 12FY 13FY 14FY 15FY16 Current Structure Fixed Bi-Monthly Charge $16.54$17.03$17.54$18.07$18.61 Usage Rate per 1,000 gal. $3.86$3.98$4.10$4.22$4.35 Alternative Rate Structure Fixed Bi-Monthly Charge $16.87$17.26$17.66$18.06 Residential Usage Rates per 1,000 gal. Tier 1: 0 to 6k gallons (35% of bills) $2.99$3.09$3.19$3.30 Tier 2: 6k to 20k gallons (59% of bills) $4.48$4.63$4.79$4.94 Tier 3: Over 20k gallons (6% of bills) $7.47$7.72$7.98$8.24 Non-Residential Usage Rate $4.04$4.17$4.31$4.45 Net Revenue Requirements $1.19$1.33$1.47$1.61$1.65 Revenue under Financial Plan $1.40$1.46$1.52$1.59$1.66 Surplus / (Shortfall) $0.20$0.13$0.05($0.02)$0.01 Numbers may not add due to rounding. Water Revenue Increases 3%

19. Financial Plan and Rate Recommendation 19 FY 12FY 13FY 14FY 15FY16 Current Structure – Based on 100% of water Consumption Fixed Bi-Monthly Charge $25.09$28.85$33.18$38.16$40.06 Usage Rate per 1,000 gal. $8.61$9.90$11.39$13.10$13.75 Alternative Rate Structure – Capped at Winter Consumption Fixed Bi-Monthly Charge $42.64$48.65$55.51$57.83 Usage Rate per 1,000 gal. $12.02$13.85$15.96$16.80 Net Revenue Requirements $1.91$2.11$2.25$2.37$2.45 Revenue under Financial Plan $1.59$1.85$2.16$2.51$2.67 Surplus / (Shortfall) ($0.32)($0.26)($0.09)$0.14$0.22 Numbers may not add due to rounding. Sewer Revenue Increases 15% 5%

20. Sample Bills 20 Customer ClassMeter Size Residential5/8" Winter UseNon-Winter Use 10,00012,000 Customer ClassMeter Size Residential5/8" Winter UseNon-Winter Use 20,00026,000 Customer ClassMeter Size Commercial1" Usage 40,000 Average User High User, Peak User Average Commercial

21. Summary and Recommendations 21  Recommended Water Revenue Increase and Rates  Recommended Sewer Revenue Increase and Rates FY 13FY 14FY 15FY16 Water Fund Revenue Increase 3% Fixed Bi-Monthly Charge $17.03$17.54$18.07$18.61 Residential Usage Rates per 1,000 gal. $3.98$4.10$4.22$4.35 Tier 1: 0 to 6k gallons (35% of bills) Tier 2: 6k to 20k gallons (59% of bills) Tier 3: Over 20k gallons (6% of bills) $16.87$17.26$17.66$18.06 Non-Residential Usage Rate $2.99$3.09$3.19$3.30 FY 13FY 14FY 15FY16 Sewer Fund Revenue Increase 15% 5% Fixed Bi-Monthly Charge $42.64$48.65$55.51$57.83 Usage Rate per 1,000 gal. $12.02$13.85$15.96$16.80

22. Benchmarking 22 Monthly Water and Sewer Cost, Residential User, 5/8” Meter, 6,000 Gallons Average = $73

23. Sample Bills 23 Customer Class Meter Size Winter Use Bi-Monthly usage Current Rates 2013 Breakeven Rates % Change 2013 Alternative A % Change Water Residential5/8"1012$59.91$59.16-1%$61.723% Residential5/8"2026$111.43$110.51-1%$142.4328% Commercial1"40 $186.58$184.57-1%$272.3846% Sewer Residential5/8"1012$114.68$170.5049%$162.8742% Residential5/8"2026$222.34$327.5247%$283.0927% Commercial1"40 $363.60$538.4048%$587.5162% Combined Residential5/8"1012$174.59$229.6532%$224.5829% Residential5/8"2026$333.77$438.0331%$425.5327% Commercial1"40 $550.18$722.9831%$859.8956%