City of Lebanon, Missouri Electric Department Results of the Cost of Service Study June 1, 2017 Presented by Craig Woycheese, CPA Senior Rate Analyst cwoycheese@tothassociates.com 417-818-0879

Revenue Requirement The municipal electric department must generate enough revenues to recover the following costs in order to maintain its equity position. Operating expenses – cost of power, operations, maintenance, customer service, administration, and replacement costs Cost of debt – interest expense on debt to finance plant Capital improvements 6/1/2017

Notes on Revenue and Expense Projections Test year data represents historic financial data for twelve (12) months ending December 31, 2016. Adjustments to the test year financial data represent dollar adjustments to the historic data based on the fiscal year 2016/2017 budget with the exception of customer billings, PILOT, depreciation, and purchased power. Customer billings are based on test year consumption and test year ending electric rates. PILOT is based on 5% of customer billings. Purchase power is based on test year purchases and estimated rates provided by MPUA. Depreciation is based on estimated gross plant and the Electric Department’s depreciation rates. Pro forma year one represents the test year adjusted for budget considerations noted above. 6/1/2017

Revenue and Expense Projections Model Year 1 Year 2 Year 3 Inflation 12/31/2016 Adjustments 12/31/2017 12/31/2018 12/31/2019 Rate Item Test Year to Test Year Pro Forma Revenues 1.00% Customer Billings $24,016,105 $657,344 $24,673,449 $24,920,184 $25,169,386 0.00% Other Revenue $459,137 -$138,137 $321,000 Total Revenue $24,475,243 $519,207 $24,994,449 $25,241,184 $25,490,386 Expenses 0.64% Wholesale Power $20,462,298 $19,746 $20,482,044 $20,612,380 $20,743,546 2.00% Employee-Related $1,372,864 $218,756 $1,591,620 $1,623,452 $1,655,921 Other Operating Expenses $430,506 $144,256 $574,762 $586,257 $597,982 PILOT @ 5% of Customer Billings $1,200,805 $32,868 $1,233,672 $1,246,009 $1,258,469 4.00% Depreciation $49,014 $776,149 $825,163 $858,170 $892,497 Other Non-Operating Expenses -$268,086 $268,086 $0 Total Expenses $23,247,401 $1,459,861 $24,707,262 $24,926,269 $25,148,415 Operating Margin $1,227,842 -$940,654 $287,188 $314,915 $341,970 6/1/2017

Revenue and Expense Projections Model Year 4 Year 5 Year 6 Year 7 Year 8 Inflation 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 Rate Item Pro Forma Revenues 1.00% Customer Billings $25,421,080 $25,675,290 $25,932,043 $26,191,364 $26,453,277 0.00% Other Revenue $321,000 Total Revenue $25,742,080 $25,996,290 $26,253,043 $26,512,364 $26,774,277 Expenses 0.64% Wholesale Power $20,875,546 $21,008,386 $21,142,071 $21,276,608 $21,412,000 2.00% Employee-Related $1,689,040 $1,722,821 $1,757,277 $1,792,423 $1,828,271 Other Operating Expenses $609,942 $622,141 $634,584 $647,275 $660,221 PILOT @ 5% of Customer Billings $1,271,054 $1,283,765 $1,296,602 $1,309,568 $1,322,664 4.00% Depreciation $928,197 $965,325 $1,003,937 $1,044,095 $1,085,859 Other Non-Operating Expenses $0 Total Expenses $25,373,778 $25,602,436 $25,834,472 $26,069,969 $26,309,015 Operating Margin $368,301 $393,854 $418,571 $442,395 $465,263 6/1/2017

Revenue and Expense Projections Model Year 9 Year 10 Year 11 Year 12 Year 13 Inflation 12/31/2025 12/31/2026 12/31/2027 12/31/2028 12/31/2029 Rate Item Pro Forma Revenues 1.00% Customer Billings $26,717,810 $26,984,988 $27,254,838 $27,527,387 $27,802,660 0.00% Other Revenue $321,000 Total Revenue $27,038,810 $27,305,988 $27,575,838 $27,848,387 $28,123,660 Expenses 0.64% Wholesale Power $21,548,254 $21,685,375 $21,823,368 $21,962,240 $22,101,995 2.00% Employee-Related $1,864,837 $1,902,133 $1,940,176 $1,978,979 $2,018,559 Other Operating Expenses $673,425 $686,894 $700,632 $714,644 $728,937 PILOT @ 5% of Customer Billings $1,335,891 $1,349,249 $1,362,742 $1,376,369 $1,390,133 4.00% Depreciation $1,129,293 $1,174,465 $1,221,443 $1,270,301 $1,321,113 Other Non-Operating Expenses $0 Total Expenses $26,551,699 $26,798,116 $27,048,361 $27,302,534 $27,560,737 Operating Margin $487,111 $507,872 $527,477 $545,853 $562,923 6/1/2017

Revenue and Expense Projections Model Year 14 Year 15 Year 16 Year 17 Year 18 Inflation 12/31/2030 12/31/2031 12/31/2032 12/31/2033 12/31/2034 Rate Item Pro Forma Revenues 1.00% Customer Billings $28,080,687 $28,361,494 $28,645,109 $28,931,560 $29,220,875 0.00% Other Revenue $321,000 Total Revenue $28,401,687 $28,682,494 $28,966,109 $29,252,560 $29,541,875 Expenses 0.64% Wholesale Power $22,242,640 $22,384,179 $22,526,619 $22,669,966 $22,814,225 2.00% Employee-Related $2,058,930 $2,100,109 $2,142,111 $2,184,953 $2,228,652 Other Operating Expenses $743,516 $758,386 $773,554 $789,025 $804,806 PILOT @ 5% of Customer Billings $1,404,034 $1,418,075 $1,432,255 $1,446,578 $1,461,044 4.00% Depreciation $1,373,958 $1,428,916 $1,486,073 $1,545,516 $1,607,336 Other Non-Operating Expenses $0 Total Expenses $27,823,078 $28,089,665 $28,360,613 $28,636,038 $28,916,063 Operating Margin $578,609 $592,829 $605,496 $616,522 $625,813 6/1/2017

Revenue and Expense Projections Model Year 19 Year 20 Inflation 12/31/2035 12/31/2036 Rate Item Pro Forma Revenues 1.00% Customer Billings $29,513,084 $29,808,215 0.00% Other Revenue $321,000 Total Revenue $29,834,084 $30,129,215 Expenses 0.64% Wholesale Power $22,959,402 $23,105,502 2.00% Employee-Related $2,273,225 $2,318,690 Other Operating Expenses $820,902 $837,320 PILOT @ 5% of Customer Billings $1,475,654 $1,490,411 4.00% Depreciation $1,671,630 $1,738,495 Other Non-Operating Expenses $0 Total Expenses $29,200,813 $29,490,418 Operating Margin $633,272 $638,797 6/1/2017

Capital Improvement Plan Description 2017 2018 2019 2020 2021 Total General Distribution Projects $960,000 $4,800,000 General Transmission Projects $240,000 $1,200,000 Total Projects # $6,000,000 # Does not include 161 kV substation and transmission project. Based on four percent inflation on gross plant. 6/1/2017

Cash Flow Projection Description 2017 2018 2019 2020 2021 Operating Margin # $287,188 $314,915 $341,970 $368,301 $393,854 Add: Depreciation Expense $825,163 $858,170 $892,497 $928,197 $965,325 Cash from Operations $1,112,351 $1,173,085 $1,234,467 $1,296,498 $1,359,178 Less: Capital Expenses $1,200,000 Principal Payments $0 Change in Cash Position -$87,649 -$26,915 $34,467 $96,498 $159,178 Beginning Cash and Short-Term Investments $9,932,830 $9,845,182 $9,818,267 $9,852,734 $9,949,232 Ending Cash and Short-Term Investments $10,108,410 # Assumes annual one percent rate adjustments and normal inflation on operating expenses. Includes cash and short-term investment accounts 1000, 1015, and 1020. 6/1/2017

Minimum Cash Reserve Five Risk Factors to Consider % Risk to Allocate Amount O&M Expenses (less Power Costs and Depreciation) 12.3% $ 418,207 Power Costs 13.1% 2,677,921 Historic Investments in Assets 2.0% 582,037 Annual Debt Payment 0.0% Total Five-Year Capital Plan 20.0% 1,200,000 Total of Five Risk Factors $4,878,165 6/1/2017

Rate Base and Rate of Return I. Rate Base Account Amount Utility Plant in Service $29,101,831 Plus: Construction Work in Progress $0 Total Less: Accumulated Depreciation $14,550,915 Net Plant Cash Working Capital: 30 days of Wholesale Power 30 / 365 * $20,482,044 = $1,683,456 45 days of Other Expenses 45 $3,400,054 $419,185 Total Rate Base $16,653,556 II. Rate of Return Operating Rate of Year Margin Return Pro Forma Year 12/31/2017 $287,188 1.7% 6/1/2017

6/1/2017

Cost of Service Analysis Cost of Service Analysis – an analysis of electric system’s costs, revenue and margin requirements, and fairness issues by analyzing these items by rate class. A cost of service analysis is generally reviewed and prepared to reflect changing loads and evolving cost structure. Updated cost of service studies are generally considered appropriate using a 5 year cycle. Rate updates are done periodically in “non cost of service years” to give consideration to changes in wholesale power costs. 6/1/2017

Allocation of Rate Base to Rate Classes Customer Related: Minimum plant to serve customer class Includes span of primary, pole, transformer, meter, and secondary Allocated to rate classes in proportion to customers on system Backbone Related: Remaining plant required to support the peak demand needs of the customers Allocated based on peak demands of the customer classes Rate Classes 6/1/2017

Allocation of Expenses to Rate Classes Customer Metering expense Customer service expense Portion of other operating expenses based on customer plant Allocated in proportion to customers by rate class Purchased Demand Demand expense portion of the cost of purchased power Allocated based on rate class coincident demand Purchased Energy Energy expense portion of the cost of purchased power Allocated in proportion to kWh purchases by rate class Backbone Remaining expenses after customer and purchased power Allocated based on peak demands of the customer classes Rate Classes 6/1/2017

Cost of Service Summary – Existing Rates and Pro Forma Year 1 Operating Expenses Residential Comm. 1 Comm. 2 Comm. Ind. Industrial 1 Industrial 2 City Use Lighting Total Revenue - Sales $7,825,365 $2,175,803 $3,569,522 $2,847,997 $2,233,581 $5,366,697 $614,557 $39,928 $24,673,449 Revenue - Other $259,279 $45,099 $8,460 $1,375 $358 $171 $6,258 $0 $321,000 Total Revenue $8,084,644 $2,220,902 $3,577,982 $2,849,371 $2,233,939 $5,366,868 $620,815 $24,994,449 Distribution Expenses: Customer-Related $1,271,590 $341,667 $93,634 $44,036 $21,431 $22,552 $65,601 $24,494 $1,885,004 Demand-Related $745,803 $213,824 $338,797 $280,665 $203,345 $507,220 $68,472 $1,833 $2,359,959 Total Distribution Expenses $2,017,393 $555,491 $432,431 $324,701 $224,776 $529,771 $134,073 $26,327 $4,244,963 Wholesale Power Expenses: $1,992,975 $571,435 $905,324 $749,991 $543,344 $1,355,194 $182,945 $6,301,207 Energy-Related $4,254,937 $1,120,863 $1,996,475 $1,640,751 $1,261,944 $3,407,951 $458,992 $19,179 $14,161,091 Total Wholesale Power Expenses $6,247,912 $1,692,298 $2,901,799 $2,390,741 $1,805,288 $4,763,145 $641,937 $20,462,298 Operating Margin ($180,660) ($26,887) $243,752 $133,929 $203,875 $73,952 ($155,195) ($5,578) $287,188 Rate Base: $4,144,999 $1,180,119 $326,659 $155,798 $76,672 $80,513 $228,587 $126,003 $6,319,351 $3,265,853 $936,329 $1,483,585 $1,229,025 $890,442 $2,221,104 $299,838 $8,029 $10,334,205 Total Rate Base $7,410,852 $2,116,448 $1,810,245 $1,384,823 $967,115 $2,301,617 $528,425 $134,032 $16,653,556 Rate of Return on Rate Base -2.4% -1.3% 13.5% 9.7% 21.1% 3.2% -29.4% -4.2% 1.7% 6/1/2017

Cost of Service Summary – Levelized Rates of Return Residential Comm. 1 Comm. 2 Comm. Ind. Industrial 1 Industrial 2 City Use Lighting Total Revenue - Sales $8,209,337 $2,260,753 $3,375,433 $2,752,059 $2,056,238 $5,355,889 $614,557 $49,183 $24,673,449 Revenue - Other $259,279 $45,099 $8,460 $1,375 $358 $171 $6,258 $0 $321,000 Total Revenue $8,468,617 $2,305,853 $3,383,893 $2,753,434 $2,056,596 $5,356,060 $620,815 $24,994,449 Distribution Expenses: Customer-Related $1,271,590 $341,667 $93,634 $44,036 $21,431 $22,552 $65,601 $24,494 $1,885,004 Demand-Related $745,803 $213,824 $338,797 $280,665 $203,345 $507,220 $68,472 $1,833 $2,359,959 Total Distribution Expenses $2,017,393 $555,491 $432,431 $324,701 $224,776 $529,771 $134,073 $26,327 $4,244,963 Wholesale Power Expenses: $1,992,975 $571,435 $905,324 $749,991 $543,344 $1,355,194 $182,945 $6,301,207 Energy-Related $4,254,937 $1,120,863 $1,996,475 $1,640,751 $1,261,944 $3,407,951 $458,992 $19,179 $14,161,091 Total Wholesale Power Expenses $6,247,912 $1,692,298 $2,901,799 $2,390,741 $1,805,288 $4,763,145 $641,937 $20,462,298 Operating Margin $203,312 $58,063 $49,663 $37,992 $26,532 $63,143 ($155,195) $3,677 $287,188 Rate Base: $4,144,999 $1,180,119 $326,659 $155,798 $76,672 $80,513 $228,587 $126,003 $6,319,351 $3,265,853 $936,329 $1,483,585 $1,229,025 $890,442 $2,221,104 $299,838 $8,029 $10,334,205 Total Rate Base $7,410,852 $2,116,448 $1,810,245 $1,384,823 $967,115 $2,301,617 $528,425 $134,032 $16,653,556 Rate of Return on Rate Base 2.7% -29.4% 1.7% Dollar Increase $383,972 $84,950 ($194,089) ($95,937) ($177,343) ($10,808) $9,255 Percent Increase 4.9% 3.9% -5.4% -3.4% -7.9% -0.2% 0.0% 23.2% 6/1/2017

Cost of Service Summary – Unbundled Unit Costs Rate Residential Comm. 1 Comm. 2 Comm. Ind. Industrial 1 Industrial 2 City Use Load Data: No. of Bills 69,604 12,107 2,271 369 96 46 1,680 kW Sold (Peak Demand) 530,897 93,235 116,499 94,117 62,070 133,715 38,180 kWh Sold (Consumption) 77,510,917 20,418,431 36,369,180 29,889,060 23,696,440 63,993,600 8,361,318 Load Factor 20.00% 30.00% 42.76% 43.50% 52.30% 65.56% Consumption Unit Analysis: Revenue - Sales $0.10096 $0.10656 $0.09815 $0.09529 $0.09426 $0.08386 $0.07350 Revenue - Other $0.00335 $0.00221 $0.00023 $0.00005 $0.00002 $0.00000 $0.00075 Total Revenue $0.10430 $0.10877 $0.09838 $0.09533 $0.09427 $0.08387 $0.07425 Distribution Expenses: Customer-Related $0.01641 $0.01673 $0.00257 $0.00147 $0.00090 $0.00035 $0.00785 Demand-Related $0.00962 $0.01047 $0.00932 $0.00939 $0.00858 $0.00793 $0.00819 Total Distribution Expenses $0.02603 $0.02721 $0.01189 $0.01086 $0.00949 $0.00828 $0.01603 Wholesale Power Expenses: $0.02571 $0.02799 $0.02489 $0.02509 $0.02293 $0.02118 $0.02188 Energy-Related $0.05489 $0.05325 Total Wholesale Power Expenses $0.08061 $0.08288 $0.07979 $0.07999 $0.07618 $0.07443 $0.07677 Operating Margin ($0.00233) ($0.00132) $0.00670 $0.00448 $0.00860 $0.00116 ($0.01856) Unbundled Unit Costs: Customer Cost Per Month $19.30 $29.90 $43.71 $126.62 $237.01 $520.43 $41.39 Average Demand Cost Per kWh $0.03533 $0.03846 $0.03421 $0.03448 $0.03151 $0.02910 $0.03007 Average Demand Cost Per kW $5.16 $8.42 $10.68 $10.95 $12.03 $13.93 $6.59 Average Energy Cost Per kWh Average Operating Margin Per kWh 6/1/2017

Monthly kWh Usage By Rate 11/21/2016

Residential Existing and Proposed Rates Existing Rates Proposed Rates Residential Service Availability Charge @ $0.00 / mo. $10.00 First 15 kWh $0.6215 / kWh $0.0978 Next 85 kWh $0.1738 Next 150 kWh $0.1045 Next 750 kWh $0.0902 Next 1000 $0.0803 Remaining Summer kWh Remaining Winter kWh $0.0671 Minimum Bill $9.25 6/1/2017

Commercial 1 Existing and Proposed Rates Existing Rates Proposed Rates Commercial 1: <= 25 kW and <= 10,000 kWh /Mo. Service Availability Charge @ $0.00 / mo. $15.00 Summer:   First 20 kWh $0.6215 / kWh $0.0978 Next 80 kWh $0.1738 Next 150 kWh $0.1045 Remaining kWh $0.0957 Minimum Bill $11.20 Winter: First 100 kWh $0.4972 $0.0825 $44.40 6/1/2017

Commercial 2 Existing and Proposed Rates Existing Rates Proposed Rates Commercial 2: > 25 kW and <= 150 kW   Service Availability Charge @ $0.00 / mo. $40.00 Summer: Demand $8.72 / kW $7.30 Energy: First kW x 200 $0.0825 / kWh $0.0723 Next kW x 200 $0.0737 Remaining kWh $0.0649 Winter: $6.30 $0.0748 $0.0671 $0.0627 Minimum Bill $218.00 6/1/2017

Commercial Industrial Existing and Proposed Rates Existing Rates Proposed Rates Commercial Industrial: > 150 kW and <= 500 kW Service Availability Charge @ $0.00 / mo. $120.00 Summer:   Demand: First 100 kW $10.77 / kW $7.70 Next 300 kW $9.22 Excess kW $7.88 Energy: First kW x 400 $0.0715 / kWh $0.0696 Remaining kWh $0.0649 Winter: Demand $6.30 $0.0627 Minimum Bill $1,615.00 6/1/2017

Industrial 1 Existing and Proposed Rates Existing Rates Proposed Rates Industrial 1: > 500 kW and <= 1,500 kW   Service Availability Charge @ $0.00 / mo. $240.00 Demand: First 400 kW $9.63 / kW $9.05 Excess kW $7.79 Energy: First kW x 400 $0.0715 / kWh First 400 kWh/kW $0.0696 Remaining kWh $0.0660 Excess kWh/kW Minimum Bill $4,815.00 6/1/2017

Industrial 2 Existing and Proposed Rates Existing Rates Proposed Rates Industrial 2: > 1,500 kW   Service Availability Charge @ $0.00 / mo. $480.00 Demand: First 400 kW $9.63 / kW Excess kW $7.79 Energy: First 1,400,000 kWh $0.0715 / kWh $0.0676 Next 3,600,000 kWh $0.0561 $0.0531 Remaining kWh $0.0484 Minimum Bill $14,445.00 6/1/2017

Billing Comparison Summer Rate – Residential Service Existing Proposed Rate Change kWh Rates Amount Percent $9.25 $10.00 $0.75 8.11% 15 $9.32 $11.47 $2.14 23.00% 100 $24.10 $19.78 -$4.32 -17.91% 250 $39.77 $34.45 -$5.32 -13.38% 500 $62.32 $58.90 -$3.42 -5.49% 750 $84.87 $83.35 -$1.52 -1.79% 1,000 $107.42 $107.80 $0.38 0.35% 1,250 $127.50 $127.88 0.30% 1,500 $147.57 $147.95 0.26% 2,000 $187.72 $188.10 0.20% 3,000 $268.02 $268.40 0.14% 4,000 $348.32 $348.70 0.11% Rate Service Availability Charge @ $0.00 First 15 kWh $0.6215 $0.0978 Next 85 kWh $0.1738 Next 150 kWh $0.1045 Next 750 kWh $0.0902 Remaining kWh $0.0803 Minimum Bill 6/1/2017

Billing Comparison Winter Rate – Residential Service Existing Proposed Rate Change kWh Rates Amount Percent $9.25 $10.00 $0.75 8.1% 15 $9.32 $11.47 $2.14 23.0% 100 $24.10 $19.78 -$4.32 -17.9% 250 $39.77 $34.45 -$5.32 -13.4% 500 $62.32 $58.90 -$3.42 -5.5% 750 $84.87 $83.35 -$1.52 -1.8% 1,000 $107.42 $107.80 $0.38 0.4% 1,250 $127.50 $127.88 0.3% 1,500 $147.57 $147.95 2,000 $187.72 $188.10 0.2% 3,000 $254.82 $268.40 $13.58 5.3% 4,000 $321.92 $348.70 $26.78 8.3% Rate Service Availability Charge @ $0.00 First 15 kWh $0.6215 $0.0978 Next 85 kWh $0.1738 Next 150 kWh $0.1045 Next 750 kWh $0.0902 Next 1,000 kWh $0.0803 Remaining kWh $0.0671 Minimum Bill 6/1/2017

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