1. Wilderness Rim Association Water Rate and Reserve Study Board Meeting April 23, 2014 Presented By: Chris Gonzalez, Project Manager

2. Page 2 Agenda Overview of Utility Rate Making Discussion of Utility Financial Policies Sources & Uses of Funds Utility Reserve Structure System Reinvestment (Funded by Surcharge) Financial Performance Standards Summary of Financial Forecast & Rate Strategy Questions/Discussion

3. Page 3 Introduction to Utility Rate Making Utility rates are set to recover the cost of providing service Utilities incur two primary types of costs: Operating costs (regular/ongoing) Employee salaries and benefits Power and chemicals Asset repair and maintenance Capital costs (inconsistent/limited) Infrastructure replacement Facility expansions and upgrades

4. Page 4 General Methodology 3. Define Rate Revenue Requirement 3. Define Rate Revenue Requirement 2. Forecast Revenues 2. Forecast Expenses 1. Establish Policy Framework

5. Page 5 Policy Framework Fiscal policies provide a sound basis for financial management of a utility, addressing various topics including (but not limited to): Sources & Uses of Funds Utility Reserves (Structure & Levels) Rate-Funded Capital Reinvestment Financial Performance Standards

6. Page 6 Sources & Uses of Funds The water utility is an “enterprise” Water rates are set based on the cost of providing service Water utility costs are funded by water utility revenues, without support from the General Fund or assessment revenues The utility maintains a separation of capital and operating resources/expenditures Current budget reflects an allocation of surcharge revenue to the Water Reserve (for capital) Revenue from water sales and other operating revenues must fund the cost of system operation and maintenance

7. Page 7 Utility Reserve Structure The Association maintains a separate ‘Water Reserve’ for capital expenditures. Potential purposes for this reserve include: Potential PurposeSample Balance Target Segregating funds designated for capital purposes (No explicit minimum balance) Protecting against capital cost overruns 10% of rolling six-year capital improvement program Providing funding for emergency infrastructure replacement 2% of fixed asset cost (≈ $8,500) or Cost of most expensive asset (could be ≈ $250,000 for original water system) Providing funding for a long-term asset management program Linked to water system replacement cost (could be ≈ $1 million based on current system valuation)

8. Page 8 Considerations for Sizing Water Reserve Potential exposure to financial liability Regulatory changes (e.g. water quality or fire flow standards) Other capital investment needs identified in Water System Management Plan Accumulating infrastructure replacement liability Availability of other funding sources Limited access to external funding can justify a larger fund balance Potential impacts to ratepayers Reserve funding comes from monthly surcharges imposed on customers (currently $8.00 per bimonthly billing period per customer)

9. Page 9 Other Utility Reserves Other common reserves not currently in place for the Water Utility: Operating Reserve Intent: Manage short-term fluctuations in revenue and expense cycles Benchmark: 30 – 45 days (8 – 12%) of budgeted operating expenses 2013-14 Budget  Target balance of $19,500 – $29,250 Rate Stabilization Reserve (Not Funded In This Study) Intent: Protect against revenue loss during low-sales years Benchmark: 20 – 25% of annual rate revenue Goal: Cover a 10% revenue shortfall for up to 2.5 years 2013-14 Budget  Target balance of $42,300 – $52,900

10. Page 10 System Reinvestment The Association’s water rates are set to cover the cost of system operation and maintenance Funding for asset replacement is an important part of a long- term rate-management strategy Infrastructure replacement can be costly Deferred maintenance also has costs Potential benchmarks for annual system reinvestment funding Depreciation expense (based on original cost) Depreciation expense (based on replacement cost) Sinking fund (based on anticipated needs)

11. Page 11 System Reinvestment: WRA Example Assumptions: Cost of original water system (1986): $247,061 50-year useful life  replace original water system in 2036 3% annual cost inflation  estimated 2036 replacement cost = $1.3 million 1% investment interest rate 2013 Reserve Balance: $502,937 Projected 2014 – 2019 capital expenditures: $75,510 Potential benchmarks for annual system reinvestment funding: Original-Cost Depreciation: $247,061  50 years = $4,941 Replacement-Cost Depreciation: $4,941 × (1.03) Asset Age Sinking Fund: $27,382 Annual transfer needed to fully cover projected replacement cost in projected year of replacement, given other projected expenses Annual transfers escalate with inflation, ranging from $10,983 – $21,677 per year

12. Page 12 System Reinvestment: WRA Example Cash Accumulated for Replacement of Original Water System Replacement-cost basis funds ≈ 81% of replacement liability Original-cost basis funds ≈ 52% of replacement liability Replacement Cost in 2036: $1.3 Million System reinvestment policies intend to generate a reasonable level of cash funding, considering near- term financial impacts.

13. Page 13 WRA Surcharge for System Reinvestment The Association currently charges its customers a bimonthly surcharge of $8.00 per account Projected to generate ≈ $31,000 per year 2013-2014 Budget: Revenue goes to reserve for capital Annual transfer of ≈ $36,000 would be needed to cash-fund replacement of all current water system assets Based on projected infrastructure replacement needs, assuming that assets need to be replaced 50 years from their acquisition date Relies on available water system asset records and assumptions (see previous WRA system reinvestment example) Would equate to a bimonthly surcharge of ≈ $9.30 per account

14. Page 14 Financial Performance Standards Goal: Water utility generally maintains non-negative cash flow Water revenues are adequate to cover the water utility’s expenses Short-term deficits may be allowed as part of a multi-year rate strategy Goal: Maintain reserves at or above targeted levels Rate studies should plan to meet reserve targets If a reserve’s balance falls below its target level, the Association should plan to replenish it over several years Goal: Comply with financial performance requirements established by debt agreements Not currently (or expected to be) an issue for the Association May become an issue if the Association needs to secure external financing (e.g. bank loan) to fund capital projects

15. Page 15 Revenue Forecasting Water Sales: Based on estimated FY- 2013-14 sales revenue and prevailing water rates Assumes no growth Surcharges: Estimated based on customer statistics and prevailing surcharges ‒ Water surcharge ($8.00 per billing period) – ongoing ‒ Reserve study surcharge ($1.34 per billing period; expires in mid-2016) Other Operating Revenues: Based on FY 2013-14 Budget (with no growth) ‒ Late Fees: $10,500 ‒ Transfer Fees: $2,000 ‒ Lock/Reconnect Fees: $1,000

16. Page 16 Expense Forecasting Sallal O&M Contract: Based FY-2013-14 Budget, reduced to reflect WRA’s assumption of billing responsibilities as of Jan 2014 4% increase for FY 2014-15 negotiated with Sallal Assumed to increase by 3% per year beyond FY 2014-15 Administrative Costs: Water utility’s allocation based on FY 2013-14 Budget Increased to reflect WRA’s assumption of billing responsibilities as of Jan 2014 Labor costs increase by 2.5 – 4.0% per year; other costs increase with inflation (1.7 – 2.5% per year). Sallal Water Purchases: Based on FY 2013-14 Budget 4% increase for FY 2014-15 negotiated with Sallal Assumed to increase by 3% per year beyond FY 2014-15 Water Reserve Transfers: Reflects transfer of surcharge revenues to reserve Other Water Operations: Based on FY 2013-14 Budget Assumed to increase with inflation (1.7 – 2.5% per year)

17. Page 17 Capital Needs Forecast Capital Costs Through 2019*: Sampling Stations: $37,250 Hydrant Modifications: $9,403 Meter Replacements: $5,321 Water System Plan Update: $32,939 Total: $84,913 Planned Funding Strategy: $84,913 in cash funding from existing Water Reserve resources and surcharge revenue *Reflects adjustments for future cost inflation at ≈ 3.2% per year

18. Page 18 Water Revenue Requirement Analysis Revenue at existing rates is insufficient to fully cover costs Partially due to increase in allocation of admin costs to water utility Driven by assumption of meter reading/billing duties by WRA Operating deficit is expected to grow as costs increase over time Recommended financial policies also have an impact… Water utility does not currently have an operating reserve General Fund operating reserve can be used in emergencies Goal is for the water utility to be self-sustaining Assumed $71,000 interfund loan from the Water Reserve Funds water utility operating reserve and enables the phasing of rate increases over several years Balances recommended “sources and uses” and “financial performance” policies with near-term financial reality

19. Page 19 Water Utility Financial Forecast Forecast SummaryCurrentFY 2015FY 2016FY 2017FY 2018FY 2019 Annual Rate Increase9.0% 8.0% Bimonthly Bill @ 1,100 CF$54.12$58.99$64.30$70.09$75.70$81.76 Plus: Surcharges 9.34 8.00 Total Bimonthly Bill$63.46$68.33$73.64$78.09$83.70$89.76 Change From Prior Year$4.87$5.31$4.45$5.61$6.06 % Change From Prior Year+7.7%+7.8%+6.0%+7.2% Alternative: Upfront rate increase of ≈ 28%

20. Page 20 Recommendations Establish a separate operating reserve for the water utility Consider establishing a rate stabilization reserve as resources allow Provides protection against revenue risk resulting from low-sales years Maintain surcharge of $8.00 per month per account Continue to allocate surcharge revenue to the Water Reserve System reinvestment is an ongoing need  consider integrating into the “basic” water rate (rather than as a separate “surcharge”) Increase water rates by 9% for FY 2015 Review utility rates annually