HomeMy WebLinkAboutAgenda Bill PresentationPart2 11/1/2010i
' M ATER AND WASTEWATER
FINANCIAL P LAN AND RATE S TUDY
FW AL DRAFT REPORT
' 'lIF'at4Y'. +�♦ w #� art r�:,! �r �" iln , ppa „;;i+^af""bF�. ?tlr`i14.hriVo-s„ r, ","w7;kF'�' rf` P: �tt�,.' t , 5 irE� °�r�?£h :�3rFmi�x
1
1 October 27, 2010
1 3053 Freeport Boulevard #158 • Sacramento, CA 958184346 • (916) 444 -9622 a www.TheReedGroup.org
' WATER AND WASTEWATER
CITYOF PETALUMA FINANCIAL PLAN AND RATE STUDY
TABLE OF CONTENTS
EXECUTIVESUMMARY ...................................................................... ..............................1
INTRODUCTION....................................................................................................... ..............................
FIVE -YEAR FINANCIAL PLANS ................................................................................. ..............................2
WATER AND WASTEWATER RATES AND RATE STRUCTURES .............:..................... ..............................6
II. FIVE -YEAR FINANCIAL PLANS ....................................................... .............................11
FUND /RESERVE STRUCTURE AND CASH FLOWS .................................................... .............................11
FINANCIALPLAN ASSUMPTIONS ............................................................................. .............................13
WATER SYSTEM FINANCIAL PLAN ...................................................................:...... .............................20
WASTEWATER SYSTEM FINANCIAL PLAN ............................................................... .............................24
III WATER RATES .................................................................................... .............................31
EXISTINGWATER RATES : ...................................................................................... .............................31
RATESETTING OBJECTIVES .................................................................................. ...:.........................32
CUSTOMER ACCOUNT DATA AND WATER USE ESTI MATES ................................... ............................... 32
WATERRATE CALCULATIONS ................................................................................ .............................34
PROPOSED WATER SCHEDULE FOR 2011 .:.. ...:.........................,.
............. ............................... 39
FUTURE ADJUSTMENTS TO WATER RATES ............................................................. .............................41
IV . 'WASTEWATER RATES ................................................................... .............................44
EXISTINGWASTEWATER RATES ............................................................................ .............................44
RATESETTING OBJECTIVES .................................................................................. .............................
CUSTOMER ACCOUNT DATAAND WASTEWATER FLOW AND LOADING ESTIMATES .. .............................46
WASTEWATER RATE CALCULATIONS ..................................................................... .............................48
PROPOSED WASTEWATER RATE SCHEDULE FOR 2011 .......................................... .............................53
FUTURE ADJUSTMENTS TO WASTEWATER RATES .................................................. .............................55
THE REED GROUP, INC. DRAFT- 10/27/2010
In 2009, the City of Petaluma (City) contracted with The.Reed Group, Inc. to develop financial
plans and to conduct rate studies for the City's water and wastewater utilities. In 2007, the City
adopted 5 -.year rate plans for both utilities. The :rate' plans were intended to provide the revenues
necessary to fund ongoing operations, meet debt: service obligations, and fund capital
improvement, programs including. the construction of the Ellis Creek Water Recycling Facility
(WRF), for both' utilities through,2011.. A number of significant events have transpired since 2007
that have affected each utility's financial performance, including but not limited to a significant
9 Y�
slowdown in the g eneral econom restricted water supplies and 'higher water supply costs,
reduced water demands and sewer flows, and ballot measures potentially affecting utility rates.
Nevertheless, the 5 -year rate plans adopted in 2007 have proven to be both necessary and
sufficient. The final year of the y- yearrate plans begins in January 2011.
Finding:, The water rates approved in 2007 for 2011 are still necessary and should be
implemented as previously planned. However, `The Reed Group, Inc. believes that the
wastewater' rate increase of 13 percent'approved in 2007 for 2011 could be reduced to 9
percent In addition, 'this should also mark the end of significant rate increases for both the
water and wastewater' utilities.
This report documents the financial planning and rate analyses performed to look at the next five
years .for the water and wastewater utilities. The water utility has been financially challenged by
recent, cost increases from the County Water Agency;(SCWA). Nevertheless, the water
utility appears to be a fairlystable financial condition, though it has limited financial, reserves. The
wastewater utility has faced significant financial issues stemming from, in part„ construction and
start-up operations of the new WRF, as well as from the uncertainty created by a ballot initiative
(Measure which could roll back wastewater rates to the, levels that existed in 2006. In addition,
the difficult economic times, reduced water and wastewater demands, and a debt burden
associated with "the °construction of the Ellis Creek WRF have each contributed to the financial
conditions that exist in the utilities.
Finding: In spite of current circumstances, relative _rate stability appears possible in the near
future for both utilities.
In addition to examining the financial needs of the water and wastewater utilities, this study also
included examination of existing water and wastewater rate structures, as well as development of
recommendations to reflect rate setting objectives of reflecting the cost of providing service,
improving equity, and continuing to encourage water conservation.
Finding Relatively modest water rate structure' changes would assist in meeting the City's
:rate setting objectives.
t
Finding:' More significant changes to wastewater rates are necessary to better meet rate
setting objectives.
Any change to:.rate structures can cause some customers to_ pay more and others to pay less,
even in a revenue neutral setting. Changes to water rates would. have minor impacts on :most
customers water bills: Wastewater rates, however, will likely result in lower wastewater bills for
residential customers and higher bills for many non_ residential customers, including industrial
THE REED GROUP, INC. DRAFT — 1012712010 PAGE 1
CITY of PETALUMA
WATER AND WASTEWATER
FINANCIAL PLAN AND RATE STUDY
customers. ,Information is presented in the report-on the, impact of:proposed rate structure changes
,on water and wastewater. bills for representative
Finally, th'i's report summarizes the potential consequences that may result if the wastewater,
initiative (Measure U)'is approved during the November 2010 election:
Finding: A. rollback in the ,wastewater rates would place the in immediate' violation of its
contractual debt, obligations and would reduce revenue to an amount that ,would ultimately
prevent the City from making required debt, service payments or funding planned capital
improvements.
An »analys'is of'the.potential' impact of the rWa stewaterinitiative was presented to theCity 'Councilin
October 2009, and while some of the specifics have changed (for example 'the City. has
renegotiated the terms for repaying Lines of Credit balances), the potential ramifications of'the
initiative have not changed.
The remainder of this Executive Summary summarizes: financial plan and ,rate study
recommendations.. Other sections of the report provide additional details of the study. Section II
presents information and' assumptions related to development. of both 'the ,wat'er, and wastewater
financial plans. Section III describes water,rate and rate, structure recommendations. Section IV
describes wastewater rate and ratestructure recommendations.
Five -Year Financial Plans
The five -year financial plans for the water and,wastewater utilities cover the period from FY 10 =11
through FY 14 -15. The models are based on the City's FY 10 -1'1 budget, i5 -year capital
improvement plans, and existing'debtservice ,obligations, The financial plan models are intended .
to serve as planning and ;management °tools, and enable the City to take 4 multi -year look at its .
financial needs.
Both the water and, wastewater utilities,arel intended to be self = supporting enterprises of the City.
Thai,is, each utility is expected to generate the revenues (through usercharges, capacity fees, and
other-revenues) to cover the' ongoing costs of. (1) operations, maintenance, and administration, (2)
de I t, br i ic ,, ( stem capital nd 4 ve hems to provide needed capacity and" to rehabilitate and upgrade
of the
-.ty Y (.) prudent
Recommend I ati.on It is recommended that the City, create separate operating and capital
'funds within both the waterand'wastewater utilities.
With this financial framework, all rate, revenues as well as operating maintenance,, and debt
service costs would be reflected. in'the operating funds All capital improvement' projects would be
funded from the capital funds. Grant and /or debt proceeds would, be deposited into the capital
funds, capacity fee, revenues would accrue: to the funds, and 'transfers would' be made annually
from operating funds t'althe capital funds in supporhof the capital improvement program. This fund
structure is common among municipal ,utilities and provides "a useful means of separately
assessing the operational and capital needs of each utility; as, well as the sources, of funding .for
each. The °financial plans presented in this report follow this fund structure. It is described in more
detail .in Section II of this report:
Section 1l of this report ' presents detail's of the: five -year financial plans for both the water and
Wastewater utilities. The financial plans arewsed to,identify the annual water and wastewater rate
revenue requirements; which are:subsequently used in rate calculations.
'THE REED GROUP, INC. DRAFT — 10/27/201'Q PAGE 2
1 CITY OF PETALUMA
Wbter: Utility
WATER AND WASTEWATER
FINANCIAL PLAN,AND• RATE 'STUDY
The water. utility appears to be in a relatively stable financial situation with current revenues
generally matching current expenses, including contributions in support of the water system capital
improvement. program. The most significant, financial issue impacting the water utility is the
increased cost of water purchases from the SCWA. During .the past three years the SCWA
increased the rate charged to the -City for wholesale water purchases.by approximately 10 percent,
10 percent, and 7 ,percent, respectively. Wholesale rate increases of this magnitude were not
considered when the City developed and implemented the current financial and rate plans. The
utility has managed the increased cost of water supplies, in part, by meeting peak water demands
from groundwater, and by limiting costs in other parts of the utility's operationsand capital program.
Reduced overall water demands have also lessened'the need for purchasing water from SCWA.
The water utility has relatively little outstanding long -term debt. Based on the financial plan
information and assumptions no additional long -term debt for the water utility is anticipated within
i the five -year planning period. In addition, with proposed water rate adjustments, it is estimated that
about $1,.4 million; of water rate revenue, annually could be contributed, to the water capital fund in
support of`planned capital improvements. While average annual capital program expenditures are
about $2:5' million over the next five •years;, existing reserves as well as estimated capacity fee
revenues appear sufficient to -fund the.balance of the current water capital improvement program
without water rate increases beyond those proposed'ih this report, and without debt financing.
The water system financial plan also reflects maintenance of a 25 percent operating reserve. That
is, the balance in the operating fund is maintained -at or above; an amount equal to 25 percent of
annual operating and maintenance,, expenses, excluding debt service and transfers to the ,capital
fund. For the water utility, this would amount to about $2.48 million in FY 10-11. This operating
reserve would serve as working capital and ;be ,available. for :emergencies or unanticipated
increased expenses or reduced revenues. While operating reserves tend to range from 10 percent
to 50 percent of . °,operating and maintenance expenses, a 25 percent reserve is common
among municipal utilities. The Reed Group, Inc. believes a:25 percent operating reserve to be a
reasonable financial goal for the near - term. The issue .is discussed in greater detail in Section II of
this report.
The 5 percent water rate increase; approved in 2007 scheduled for January 2011 is still needed by
the water utility. Beyond this increase, it- recommended that'the City adopt two mechanisms for
. ' adjusting the water rates in the 'future. The first adjustrnent would be tied to any changes in the
rates charged by.the SCWA, which have generally become effective in July of each year. AB
1 3030, signed into law in, 2008, provides for the adoption, of automatic pass - through adjustments
•, related'to changes in wholesale water'purchase •costs. This adjustment would apply only to the
Water usage rates, and not to fixed service charges: .
The second rate adjustment would be an annual inflationary rate adjustment, and would be applied
to the,entire• rate structure. Based on the information and assumptions reflected in the 5 -year
financial plan, it "appears•that the water utility's financial stability can be maintained with annual rate
adjustments tied to the rate of inflation. The City has historically adjusted water rates each
January, .and'it, is recommended that this practice continue The indexing of water rates could be
tied to a San,Francisco consumer price index (CPI), such as the San Francisco - Oakland -San Jose
consumer°price index for all items and all urban consumers. (SF CPI -U).
Because of the current relatively stable status of the water utility; financial plan recommendations
for the water system are limited to the following:
THE REED GROUP, INC. DRAFT - 10/27/2010 PAGE 3
WATER AND WASTEWATER
CITY OF P.ETALUMA FINANCIAL.PLAN AND RATE STUDY
Adopt@ mechanism for automatically adjusting water rates to reflect changesin wholesale
water purchase costs from SC as described 'in Section III,of this report. The SCWA
historically has: adjusted its water rates annually effective in July of each year. Increased
revenues 'from automatic rate. adjustments are reflected in the financial plan model based'.
on assumed annual 10,percent' SCWA:rate, increases, which SCWA has indicated may be
necessary for the next five years. The proposed automatic adjustment formula would,
however, tailor the amount of the adjustment to the specific action by ;SCWA. Only the
City's water usage rates would be: affected by'this adjustment (not fixed monthly service
charges). As illu strated ' i n Section III of this report,.. a 10, percent increase in the wholesale
cost of water in FY 1'1 =12 would result'in a 4.4: percent increase in the City's water usage
rates.
Beyond theschedul'ed 5'percent'rate adjustment in January, 2011, the City,should adoptla
mechanism for adjusting water rates annually, in January, to renecttherchanges in general
inflation, using the San Francisco :CPI for this purpose. The, financial plan assumes
general inflation to be 2 percent through. FY 1 1-12 and 3 percent thereafter. Water rate
revenue projections reflect a ibual'increases of magn. itude, beginning in January 2012.
This adjustment would apply to the`entire water rate structure..
■ Maintain an operating reserve in the operating fund equal to at;l`east,25 ,percent of annual
operating and maintenance expenses, 'exclusive of debt service and transfers to the
capital fund. .
Beyond the near -term needs of ';the, water utility., consider increasing, the, annual transfer
from the operating fund to the. capital fund `consistent with long-term capital improvement
needs (to be determined) with- consideration of capacity :fee revenues and available
reserves. Rehabilitating and upgrading the water system to maintain service capability for
the long'= term.isan obligation of current;customers and should be considered in evaluating
the financial performance of the water, system. While the $1,4 million annual transfers
reflected in the financial plan appear adequate for the 5 -year planning p6tiod higher
amounts may be justified in' the: future, particularly as changes are made to the utility's
capital' improvement' program.
In conclusion„ the water system appears to be in a financially stable condition. However,
anticipated 'increases in operating and maintenance costs (principally water- purchase costs) justify
continuing to ladjust water rates tol reflect 'inflationary pressures. While, the assumptions and
information used in the preparation of' the. water system financial plan are believed to be
reasonable, no assurances can- be made that actual financial' results. will .be as presented herein.
City staff should continue to monitor.the.financial condition offthe water utility, as well as changes in
water demands and related rate revenues, to, ensure that the utility continues on a sound financial
course.
,Wastewatee Utility
The wastewater utility has been in a more challenging financial, situation than the water utility due to
(1) the debt burden largely associated with construction of the Ellis Creek WRF „and-(2) uncertainty
created by the pending. Measure U ballot initiative. Nevertheless, if the City is able to maintain its
present course, financial and rate stability is possible: In addition; it appears thatJhe wastewater
rate: increase of 13 percent approved in 2007'for January 2011 could be reduced to �9 percent, with
only annual inflationary rate adjustments required thereafter.
In FY 08 -09 the City began operation of the Ellis Creek WRF and ceased operation of °the Hopper
Street wastewater treatment facility. Construction of the Ellis Creek WRF facility is now about
THE REED'GROUP,INC. DRAFT- 10/27/2010 PA6E4
D
1
1
CITY OF PETALUMA.
WATER. AND WASTEWATER
FINANCIAL PLAN AND RATE STUDY
C
complete a the wastewater utility is moving toward steady -state treatment operations. The Ellis
Creek WRF•was completed at a total cost near $153 million, which included environmental review,
pre - design, •Value engineering, design, permitting, construction, construction management and
inspection. The project was financed primarily with a State Revolving Fund (SRF) loan from the
California State Water Resources Control Board (SWRCB). In addition, the City utilized nearly $25
million from'Lines Credit (LOCs) from two commercial banks. The City began making principal
and interesti payments on the SRF loan in Apnl 2010. In July 2010, the City repaid about $9.9
million of the LOCs and is obligated to repay the remaining $14`.75 million by June 2011.
The wastewater system financial plan reflects maintenance of a 25 percent operating reserve.
That is, the balance in the operating fund is maintained at or above an. amount equal to 25 percent
of annual operating and maintenance expenses, excluding debt service and transfers to the capital
fund. For FY 10 =11, this amounts to $2.36 million. This operating reserve would serve as working
capital and be available for emergencies or unanticipated increased expenses or reduced
revenues.
® In FY 09 -10 the City placed ,$3,5 million in available wa "stewater funds in a -rate stabilization fund, to
be used to assist in meeting debt service coverage obligations. The financial plan reflects the use
of the rate stabilization fund over the,nextthree years for this purpose. The rate stabilization fund is
!' described in greater detail in Section II of this report.
Beyond: `a. wastewater rate. - adjustment in 2011, it appears that the wastewater utility's financial
condition can be maintained with annual rate adjustments tied to the rate of inflation plus 1.5
percent. The.City has historically adjusted wastewater rates each January, and it is recommended
that'this practice continue. The indexing of wastewater rates could be tied to the San Francisco
CPI, which the City has relied upon for other purposes. 'Minimum rate increases of at least 2.0
percent are. advised .(e.g_ if general inflation is 0 percent a 2.0 percent rate increase is
recommended, rather than 1.5 percent).
The -wastewater utility had significant cash balances at the beginning of FY 10-11 as the Ellis
Creek WRF project concluded : construction. About $10 million dollars of the initial balance was
used to repay a portion of outstanding LOCs, and another $10 million. was assigned as a beginning
balance for the capital fund to be used for planned capital improvement projects. With the
proposed increase in wastewater rates in January 2011 (assuming Measure U is defeated),
ongoing wastewater rate revenues, as well as other operating revenues, should be sufficient to
cover operating costs, meet debt service obligations, contribute towards the capital improvement
program,:and maintain an operating reserve.
The City plans to: issue debt in order to refinance. the.-outstanding LOC balances. However, it is our
opinion that the 'City may not need to borrow additional funds for the wastewater and recycled
water capital improvement program within the 5 -year planning period.. It is recommended that.the
City utilize existing available reserves and current revenues capacity fees and transfers from
the operating fund to pay for planned capital improvements.
Based on the analyses performed, it appears that the most significant financial risk to the
wastewater utility's related to. the potential. rollback of rates associated with Measure U on the
November 2010 ballot. The: rollback would result in a reduction of wastewater rate revenue of
about $9.7 million, per year, relative to the 'rates proposed herein. The reduced rates would be
insufficient to cover essential: operating and maintenance costs.and debt service payments, or any
capital improvement projects. In addition, the rollback of wastewater rates would place the City in
immediate violation. of debt covenants. Some of the potential implications of a rate rollback are
summarized in Section II of'this report.
THE REED GROUP, INC.
DRAFT — 10/27/2010 PAGE 5
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Assuming Measure U does not pass in November, 'financial plan recommendations for the
wastewater utility include the following:
• Adjust the wastewater' rates in'2011 to reflect an overall increase of 9 percent, rather 1hary
the, increase of 13 percent approved in 2007.
• Beyond the rate adjustment in the. City - should adopta plan, for adjusting'wastewater
rates annually, in January to reflect the ehangesJn general inflation as retlected'in the San
P p
Francisco CPI plus 1.5 percent, as desc in Section IV,of this report'. Thisadjustment
would be subject to a 2.0 percent minimum to protect the financial: stability of the utility to
maintain service:levels.
Issue additional wastewater revenue bonds in the spring of 2011 sufficient to repay LOC
obligations,, but not for additional capital improvement projects.
Rely :on existing available cash in the capital fund, as well as: capacity fee revenues and
proposed transfers from the operating fund to pay for .planned wastewater infrastructure
improvernents and recycled water capital projects.
Use funds from the rate stabilization fund as needed over the next several years in, order
to meet debt servib& cove rage requirements.
Maintain a minimum operating reserve in'the'..operating fund equalto at leasf;25 percent of
annual operating and maintenance expenses, exclusive of debt service.
In conclusion, the wastewater system could be financially stable (assuming' Measure U is
defeated). However, anticipated increases in Joperating and maintenance costs as well as
continuing debt service obligations I and' capital program needs justify, continuing to adjust
wastewater rates' to reflect inflationary pressures: While the assumptions and information used in
the preparation of the wastewater system financial plan ; are believed 'to be reasonable, no
assurances'can,be made that actualfinancial results will be as presented herein. City staff ,should
continue to monitor the financial ,condition of the- wastewater utility, as well as changes in
wastewater demands and related rate revenues, to ensure that the utility proceeds on . a sound
financial course
!Mater and WasteWater Rates and Rate Structures
Proposed water a_ nd wastewater rates and rate structure changes are '.i'ntended to assist the City
with meeting financial obligations as well as achieving rate setting objectives. The following rate
setting objectives.have guided the development of'the proposed rate structures.for the water and
wastewater utilities.
• Rates should generate sufficient revenues to meet each utility's financial obligations
related to operations, debt service, capital .improvement need's', and. maintenance of
prudent reserves
• Rates should be equitable by reflecting they cost of providing service to each customer
class
• Rates,should continue to encourage waterconservation and efficient wateruse.
THE'REED GROUP, INC. DRAFT - 10'/27/2010 PAGE 6 1
u
.
0
CITY OF PETALUMA
WATER AND WASTEWATER
FINANCIAL PLAN AND RATE STUDY
Water Rates
Current'single family residential water rates include a fixed service charge plus a 4 -tier water usage
rates. Multi- family, commercial, institutional, industrial, and irrigation customer water rates are
subject to fixed service charges plus a uniform water usage rate.
In general, the water rates are functioning as intended. However, small changes to the water rate
structure are proposed to improve equity as well as the conservation incentive embodied in the
single family tiered water rate structure. The proposed water rates are shown in Exhibit 1 -1 and
are revenue neutral relative to the water rates scheduled to go into effect in January 2011. The
rates include a slight decrease in the monthly service charge for the smallest meter size, with
increases for most larger meter sizes. This change -is consistent with the allocation of capacity -
related costs across meter sizes in relationship to the capacity of the meters.
Exhibit 1 -1
Citv of Petaluma -- 'Department of Water Resources and Conservation
Previously Approve and Proposed Water Rates (1
Notes:
(1) Effective January 1 each year.
(2), Proposed rate restructuring is revenue neutral with the previously approved
waater rates for January 2011.
(3) Monthly tier allocations: Current Proposed
Tier 1 0 =9 hcflmo. 0 -8 hcf /mo.
Tier 2 10 -18 hcflmo. 9 -16 hcflmo.
Tier 3 19 -24 hcflmo, 17 -24 hcf /mo.
Tier 4 >24 hcf /mo. >24 hcf /mo,
(4) Includes multi- .family, commercial, institutional, industrial, and irrigation
accounts. Excludes recycled water accounts.
THE REED GROUP, INC. DRAFT - 1012712010 PAGE 7
Jan.2010
Jan.2011
Proposed
structure 2
Monthly Service Charges
Up to 314'' meter
$
5.42
$
5.69
$
5.60
1" meter (resid.)
$
6.51
$
6.84
$
7.84
1'" meter
$
6.73
$
7.07
$
7.84
1 1/2" meter
$
11.81
$,
12.40
$
13.40
2" meter
$
18.54
$
19.46
$
20.09
3 "meter
$
38.27
$
40.19
$
35.71
4" meter
$
51.55
$
54.13
$
58.02
6" meter
$
. 74.47
$
78.19
$
113.75
Water Usage Charge ($ /hcO
Single Family (3)
Tier 1
$
2.83
$
2.94
$
2.87
Tier 2
$
3.25
$
3.41
$
3.30
Tier 3
$
4.07
$
4.35
$
4.12
Tier 4
$
4.50
$
4.82 _
$
5.57
.Other Customers (4)
All water usage
$
2.96
$
3.14
$
3.15
Notes:
(1) Effective January 1 each year.
(2), Proposed rate restructuring is revenue neutral with the previously approved
waater rates for January 2011.
(3) Monthly tier allocations: Current Proposed
Tier 1 0 =9 hcflmo. 0 -8 hcf /mo.
Tier 2 10 -18 hcflmo. 9 -16 hcflmo.
Tier 3 19 -24 hcflmo, 17 -24 hcf /mo.
Tier 4 >24 hcf /mo. >24 hcf /mo,
(4) Includes multi- .family, commercial, institutional, industrial, and irrigation
accounts. Excludes recycled water accounts.
THE REED GROUP, INC. DRAFT - 1012712010 PAGE 7
(-v c DCTAI I IKAA
WATER AND WASTEWATER
FINANCIAL PL AN AND RATE STUDY
Changes are also recommended for the single family tier rate structure. It is recommended that
the first and second tier break points be reduced slightly, and that the tier step from the third to the
fourth tier be increased. Reasons and justifications for these changes are described in Section III
of this report.
The proposed water rate structure changes are modest. Customer bills may be slightly higher or
slightly lower as, a result. Most customers will have slightly lower water bills relative to the water
rates approved in 2007 scheduled to be `implemented in January 2011.. Exhibit,111 -8, near the end
of Section III includes a table showing 'the impact of proposed water rates' on representative
monthly bills.
Wastewater Rates
Current single family and multi - family residential wastewater rates include a. fixed service charge
for each dwelling unit, plus a usage charge based on each customer's winter water use. This
practice ensures that summer sewerrates more accurately reflect waste produced. by not including
irrigation use volumes. Non- residential wastewater rates . include ,a fixed service. charge, plus a
usage charge based on actual water usage. Non - residential wastewater rates also differentiate
customers into low, medium, and ,high strength categoriesto reflect the requirements of treatment.
Large industrial customers pay. a 'fixed service charge plus a usage charge based on actual
measured sewer flow and loading based on biochemical oxygen demand (BOD) and total
suspended solids (TSS).
Proposed wastewater rates reflect the cost of providing service and are based on the annual
revenue needs for 2011. The proposed 2011 wastewater rates reflect an overall 9 percent
increase relative to the current (2010) wastewater rates. The proposed rates for 2011 are a 4
percent decrease relative to the 13 percent increase approved in 2007 for January 2011.
Proposed wastewater rates are presented in Exhibit 1 -2.
Wastewater rate calculations are based on estimated wastewater flows.from each customer class,
as well as wastewaterstrength characteristics for BOD and TSS... ,Under the current rate structure,
all customers. (residential dwelling units and non-residential and industrial customers) pay the same
fixed service charge ($1678 per month in 2011). About 24 percent of the annual wastewater rate
revenue is generated through this charge. This• service charge approach does not reflect the fact
that different customers can place very different demands on the wastewater system. The rates
could be more equitably balanced if service charges reflect the capacity associated with the service
provided to customers.
The proposed wastewater rates include establishing the fixed service charge based on the size of
the water meter (similar to water rates) .for non - residential customers. All single family residential .
customers would pay the same fixed service charge, and multi- family dwelling units would pay a
slightly lower service charge (multi- family wastewater flows on average are less than single family).
Fixed service charges are also proposed for large industrial customers based on capacity of
wastewater flow meters. Wastewater usage rates reflect the estimated equitable allocation of
costs to customers with different loading characteristics.
Under the proposed wastewater rates most residential customers will have lower bills
relative to the wastewater rates approved in 2007 for 2011. Many non- residential customers will
also have lower bills, although some (particularly those with large water meters) could pay more
with the proposed rates. Most of-the City's industrial customers would bear an increased share of
utility costs under the proposed .rates. In all cases, the ,proposed wastewater rates are justified
based on cost of service. Wastewater rate calculations are presented in IV of this report.
THE REED GROUP, INC. DRAFT — 101271201 O PAGE 8
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Exhibit 1V -7, near the end of Section IV, illustrates the impact of °proposed wastewater rates on
representative monthly bills.
Exhibit 1 -2
Citv of Petaluma -- Department of Water Resources and Conservation
Previously Appro and Proposed Wastewater Kates (l
I
r
C
Notes:
(1) Effective January 1 each year.
(2) Includes customers for which wastewater flows are sampled and tested to
determine appropriate charges.
(3) Reflects an overall increase of 9 percent over the January 2010 (or a 4 percent
decrease relative to the January 2011 rates),
THE REED GROUP, INC. DRAFT - 10/27/2010 PAGE 9,
Jan.2010
Jan.2011
Proposed
Structure 3
Monthly Service Charge
Single Family Residential
$
14.85
$
16.78
$
17.22
Unmetered
$
72.08
$
81.45
$
77.05
Multi- Family Resid. (per DU)
$
14.85
$
16.78
$
15.00
Non - Residential
Up to 314" meter
$
14.85
$
16.78
$
17.22
1" meter
$
14.85
$
16.78
$
25.97
1 1/2" meter
$
14.85
$
16.78
$
47.65
2" meter
$
14.85
$
16.78
$
73.77
3" meter
$
14.85
$
16.78
$
134.75
4" meter
$
14.85
$
16.78
$
221.85
6" meter
$
14.85
$
16.78
$
439.41
Metered Industrial
2" Ultrasonic Meter
$
14.85
$
16.78
$
200.04
10" Ultrasonic Meter
$
14.85
$
16.78
$
439.45
2" Magnetic Meter
$
14.85
$
16.78
$
134.75
3" Magnetic Meter
$
14.85
$
16.78
$
287.10
4" Magnetic Meter
$
14.85
$
16.78
$
439.45
6" Magnetic Meter
$
14.85
$
16.78
$
1,092.38
Wastewater Usage. Charge ($/hco
Single Family Residential
$
7.04
$
7.96
$
7.45
Multi - Family Residential
$
7.04
$
7.96
$
7.45
Non - Residential
Low Strength
$
7.01
$
7.92
$
7.29
Medium Strength
$
8.34
$
9.42
$
9.02
High Strength.
$
10.79
$
12.19
$
11.82
Metered Industrial (2)
Flow ($lhcf)
$
5.22
$
5.90
$
5.75
BOD ($llb)
$
0.51
$
0.57
$
- 0.57
TSS ($Ab)
$
0.55
$
0.63
$
0.66
Notes:
(1) Effective January 1 each year.
(2) Includes customers for which wastewater flows are sampled and tested to
determine appropriate charges.
(3) Reflects an overall increase of 9 percent over the January 2010 (or a 4 percent
decrease relative to the January 2011 rates),
THE REED GROUP, INC. DRAFT - 10/27/2010 PAGE 9,
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Timing of Water and Wastewater Rate Increases
It is recommended that the City adjust both water and wastewater rates in the following two -step
process.
1. In January 2011 implement the 5 percent water rate increase approved in 2007 (without
modification).and a °9 percent wastewater rate "increase without any rate structure changes
(in -lieu of the 13 percent'increase approved in 2007). Because all'wastewater rates would
be reduced from those previously approved, this could be accomplished by a Resolution
of the City Council and without a formal hearing process.
2. In accordance with legal requirements; conduct the rate hearing process to: (1)
restructure the water rates in a revenue neutral manner with the water rates shown in
Exhibit 1 -1, (2) restructure the wastewater rates 'in a revenue neutral manner with the
wastewater rates shown in Exhibit 1 -2, (3) adopt the mechanism for automatically adjusting
water rates to reflect any changes in wholesale water costs from SCWA, (4) adopt the
mechanism for automatically adjusting water rates each January to reflect the changes in
the San Francisco CPI, and (5) adopt the mechanism for automatically adjusting
wastewater rates each January to reflect the changes' in the San Francisco CPI, plus 1.5
percent, subject to a 2.0 percent minimum.
The first step allows for the adjustment of water and wastewater rates based on financial needs,
based on prior approvals. The second step allows for adjustment of the rate structure consistent
with rate setting objectives, as well as adoption of automatic adjustment mechanisms. This later
step will require the formal'public hearing process, as required by Proposition 218.
Inflationary and automatic adjustment mechanisms can be approved for up to five years and then
need to be re- adopted by the City Council. A comprehensive review of the financial condition of
each utility as well as the need for further rate adjustments is also recommended by the end of the
five -year planning period covered herein, or if significant changes occur to capital improvement
plans or other aspects of utility operations.
THE REED GROUP, INC. DRAFT — 10127/2010
PAGE 10 '
C
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
This section of the report describes the five -year financial plans developed for the City's water and
wastewater utilities. The financial plans reflect the City's current operation and maintenance costs,
debt 'service obligations, and capital improvement plans, as well as various sources of revenues
and the reserves maintained by the City for various purposes.
The financial plans are intended to serve as,plann'ing and management and enable the City
to take a multi -year look at its financial needs. In :order of priority these needs include funding of
ongoing operation and maintenance, meeting debt service, obligations (including debt service
coverage requirements), maintaining prudent financial reserves, and supporting each utility's
current capital improvement program. The financial :planning models also provide a means to
examine ways to minimize utility rate increases, while still meeting financial objectives.
Financial plan models are based on information provided by the City and assumptions reviewed
with City staff. Efforts have been made "to make the analyses as complete and accurate as
possible. However, the City's utilities operate in a dynamic environment in which economic
conditions, customer demands, external costs, and other factors are outside of the City's direct
control. Future conditions and events cannot be known at this time. The financial plan models are
intended to help shape and inform decisions to be made by the City. They are not a .prediction of
the future.
Fund/Reseive Structure and Cash Flows
[�
The financial plan is a multi -year cash flow model. As a cash flow model, it differs from financial
accounting 'income statements and balance sheets. The financial plan models the sources and
uses of funds into and out of the various funds and reserves of the City's.utilities.
The waterand wastewater utilities are,each independent enterprises operated by the Department
of Water Resources and Conservation (DWRC).. As enerprise's, each utility has an independent
set of financial accounts contained .within the Water Fund and the Wastewater Fund, respectively.
Based on discussionswith DWRC and Finance staff near the outset of the study, it was decided
that the water and wastewater financial ,plan models should reflect both an operating fund and a
capital fund. Also,,dudng the.study it was determined to be _necessary to create a rate stabilization
fund within the wastewater utility to help meet debt service coverage requirements. Each of these
funds is described `below, as'well as the benefits realized from having this fund structure. `
Exhibit III -1 on the following page, schematically` illustrates the fund and reserve structura used for
financial planning and analysis purposes, as well as the major revenue inflows and expenditure
outflows. An understanding of the fund /reserve structure is helpful in understanding`the financial
plan exhibifs that model the flow of funds through each utility from one year to the Each of
the funds and reserves is described below.
THE REED GROUP INC. DRAFT - 10/27/2010 PAGE 11
WATER AND WASTEWATER
CITY. OF PETALUMA FINANCIAL PLAN AND RATE STUDY
Exhibit •` II -1
Cityyof Petaluma -- Department of,Watdr Resources and Conservation
atic Diagram of Water and Wastewater Fund Structure a nd Major Cash Flows
but currently only used by the wastewater utility.
Operating Funds The operating fund isithe primary fund for,each utility., Most water or
wastewater revenues, including user rates -and other service revenues; flow, into this fund.
All operating and maintenance- ,expenditures, including administrative costs and debt
service payments, are paid out ;of'the operating fund.. .
Operating Reserves —The primary purposes of an operating reserve to provide
working.. capital - sufficient to ,pay expenses as needed and to provide for
unanticipated or emergency expenditures thatcould'not be reasonably foreseen.
The financial plan, maintains minimum operating reserves throughout the 5 -year
planning period. Operating reserves equal to from 1.0 percent to :50 percent of
annual operating expenses is common_ within the water and. wastewater industry.,
While maintaining a 50 percentoperatng reserve may be ;an appropriate long-
term `objective it is not.. likely possible in the near - term for either utility, without
additional rate increases: . This Jssue is discussed more specifically With, each
utility later in this section, with a 25 percent minimum opetating 'reserve
recommended for the nearterm.
o Available Fund Balance — The balance in the operating funds in excess of the
operating reserve is shown in the financial plan model as the available fund
balance. When the total fund balance.'exceeds the target: reserve amount,the
available balarice'is'positivet If the fund balanceedips,below'the desired` minim um
reserve the available' balance is negative. This is a convenient way to monitor the
THEIREED GROUP, INC. DRAFT - 1.0/27'/20.10 PAGE 12'
WATER AND WASTEWATER
' CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
status of the operating fund over the planning period as various scenario analyses
' are performed.
• Capital Fund — The capital fund is used to track capital program expenditures, as well as
the monies available for capital projects. Capacity fee revenue related to new
development is reflected in the capital fund. Grant or debt proceeds obtained for capital
i, projects are also shown in the capital fund. In addition, the fund is supported through
annual transfers from the operating fund. Capital projects for each utility serve a variety of
purposes including rehabilitation and replacement, upgrade to improve service. levels, and
' expansion to add capacity for new development. While capacity fees are intended to. pay
the cost of capacity in .the utility systems, water and wastewater rates should support the
costs of rehabilitating and upgrading utility systems. Contributions to the capital program
from user rates are reflected in the financial plan models as annual transfers from the
operating to capital funds. At times the City requires developers to construct and then
dedicateneeded infrastructure to the City. Those system additions are not reflected in this
analysis.
Because capital funds are not currently included in the City's financial structure balances
at the beginning of FY 10 -11 reflect an initial segregation of the cash (net spendable
assets) within each utility between the operating and capital funds. Subsequent annual
transfers from operating funds are scheduled such that capital expenditure needs are met
while also maintaining a positive balance in the capital funds.
• Rate Stabilization Fund — The rate stabilization fund is a . mechanism allowed by the debt
covenants to assist in meeting debt service coverage obligations associated with long -
term debt. The specific obligations for debt service coverage are described later in this
section. In general, however, any money used from the rate stabilization fund can be
counted as revenue for the purpose of debt service coverage .calculations. In 2010,
t anticipating the requirements of meeting the debt service coverage obligation, the City
established a rate stabilization fund for the wastewater utility and deposited $3.5 million
into it. The financial plan model uses money from the rate stabilization fund to help meet
the debt service coverage requirement for the next.three fiscal years (FY 10-11 through
FY 12 -13). A rate stabilization fund is not needed in the water utility.
Financial Plan Assumptions
The five -year financial plans reflect a number of assumptions generally common to both utilities.
The financial plans were developed based on the City's FY 10-11 budget, existing long -term debt
obligations and debt service schedules as reflected in official statements and . related documents,
and the current five -.year capital improvement plans (CIP) for each utility. All assumptions were
reviewed with or Were provided by City staff, and are believed reasonable for the time period
covered.
General Assumptions
' A number of general assumptions are reflected in the financial plans, including inflation rates,
interest rates, customer growth rates, water .demand estimates, etc. Primary assumptions are
described below, and also shown in Exhibit II -2.
• Inflation and Interest Rates — The financial plan model includes the following assumptions
for annual inflation and interest:
o General inflation is assumed to be 2 percent through FY 11 -12 and then 3
t percent per year thereafter. This general inflation rate applies to all operating cost
items, unless otherwise noted (such as wholesale water rate increases set by
SCWA).
10/27/2010 PAGE 13
THE REED GROUP, INC. DRAFT -
CITY OF PETALUMA
WATER AND WASTEWATER
FINANCIAL PLAN AND RATE STUD
Exhibit 11 -2
Citv of Petaluma - Department of Water Resources and Conservation
Water and Wastewater Financial Plan Assum
Customer and Water Usage Assumptions
FY 09 -10 FY 10 -11 FY 11 -12 FY 12 -13 FY'13 -14 FY 14 -15
Financial Assumptions
General Inflation Rate
2.0% 3.0% 3.0% 3.0%
Chemical & Utility Infl.. Rate
5.0% 5.0% 5 :0% 5.0%
SCWA Rate Increase
10.0% 10.0% 10.0% 10.0%
Construction Rate
3.0% 3.0% 3.0% 3.0%
Interest Earnings-
0.6% 1.0% 1.0% 2,0 %0 2.0%
Target Operating Reserve
24,591
Water Utility
25% of annual operating expenses, excluding DS and capital fund transfers
Wastewater Utility
25 %, of annual operating expenses, excluding DS and:capital fund transfers
Customer and Water Usage Assumptions
No. of Water Accounts
19,286
19,286
19,336
19,386
19,436
19,511
No. of Water Equiv. Mtrs.
24,591
24,591
24,641
24,691
24,741
.24;816.
Annual Water Sales (hco
3,205,530
3,206,000
3,213,000
3,220
3,227,000
3,237,000
Annual Water Sales (AF)
7,359
7,360
7,376
7,392
7,408
7,431
Water Usage Factor
0.0%
0.0%
0.0%
0:0%
0.0%
Customer Growth.Rate
0.0 %
0.2%
0.2%
0.2%
0.3%
New Customers.(Eq. Mtrs)
50
50
50
75
75
No. of Wastewater Accounts
18,337
18,337
18,387
18,437
18;487
18,562
No. of Wastewater ESFDs
25,512
25;512
25,562
25,612
25
25,737
Customer Growth Rate
0.0%
0.0
0.2%
0.2%
0.2%
0.3%
No. New Customers (EDUs)
50
50
50
75
75
Water Supply Costs
SCWA Water Purchases
7,175`
7,296
7,553
7,811
8,077
Groundwater Pumping
950
722
. 482
242
Annual Production (AF)
8,125
8.017
8,035
8,052
8,077
%' Supply fromSCWA
88%
91%
94%
97%
100%
%`Unacet. for Losses
9.4%
8%
8%
8%
8%
SCWA Water Rate ($1AF)
$ 607
$ _ 668
S 735
$ 809
$ 890
GW Pumping. Cost - (S/AF)
$ 150
$ 158
S 166
$ 174
.$ 183
SCWA Water Purch. Cost
$ 4,355,000,
;$ 4,874,000
S 5,551
$ 6,319,000
$7,189,000
GW Pumping Cost
$ 143,000
$ 114,000
S '80'
V 42,000
$ -
Total Supply Cost
$ 4,498,000
$ 4,988,000
S 5,631,000
$ 6,351,000
$ 7,189,000
Capacity Charges
Water Capacity Charge
$ 11,299
$ 12,029
$ 1.2,390
$ 12,762
$ 13,144
$ 13,539
Water Capacity Charge Rev
$ 601,000
$ 619,000
S 638,000
$ 986000
$ 1,015,000
56.3%
< -- Portion of water capacity fee related to. recycled water projects and
transferred to wastewater capital fund for this purpose.
Wastewater Capacity Charge
$ 7,855
$ 8,363
$ 8,614
S. 8
$ 9,138
$ 9,413
WW Capacity Charge Rev
$ 418,000
$ 431,000
S . 444,000
$ 685,000
$ 706,000
67.5 %
c -- Portion of wastewater ca pacityfee. related to'EIIis.Creek.WRF
and
used to help make SRF loan payments.
THE REED GROUP, INC.
• Inflation on utility and chemical costs is assumed to be 5 percent per year due to
conditions present in the petroleum, energy, and.electric industries.
• Construction inflation. is assumed to be 3 percent per year and applies to capital
projects contained in the City's 5 -year capital 'improvement program. The 3
percentinflation rate is the,20 -year average increase in the 20- cities construction
cost index tracked by the. Engineering News,Record.
• Interestl on general cash balances is assumed to be 0.5 percent in FY 10-11, 1.0
percent in FY 11 -12 and FY 12 -13, and then 2.0 percent in'FY 13 =14 and FY 14-
DRAFT - 10/2712010
PAGE 14 1
1
r ry nG PFTAI I IMA
WATER'AND WASTEWATER
FINANCI PLAN AND RATE STUDY
15. This interest rate applies to each fund's beginning -of -year balances and
accrues to each fund.
o Interest and other terms on future long -term debt expected or planned to be
issued during the 5 -year planning period are described later in this section.
Additional long -term debt is anticipated in 2011 to repay remaining obligations
associated with lines of credit (see discussion below).
Current Customer Base — The City currently has about 19,300 water accounts.;and about
18,300 wastewater accounts. The City also provides wastewater treatment services to
slightly more than 500.homes in Penngrove. Customer account and water use data was
obtained from the City's utility billing system for FY 09 -10. Customer account, water use,
and estimated wastewater flow data are presented in greater detail in Sections III and IV of
this report. .
Growth Proiections — The financial plans conservatively assume annual growth of about
0.2 percent (equivalent to about 50 homes) each year through FY 12 -13, and then 0.3
percent (equivalent to about 75 homes) thereafter. ; Actual growth will be a function of
economic conditions, the City's development policies, and the status of new projects within
the, development pipeline. While the growth assumption is low it is reasonable given the
current economic climate.
Customer Water and Wastewater Demand — Water demand, as well as wastewater flows,
have been reduced in recent years due to the effects of the current economy, weather
conditions, and water conservation awareness and efforts. Reduced demands have had
an adverse impact.on revenues. Statewide policies are increasing the emphasis on water
conservation and efficient water use as well. While new connections will be added to 'the
water and wastewater systems as the economy recovers, no increases in water or
wastewater demands, on a per account basis, are included in the financial plan analyses
presented herein. This is a reasonable assumption given the relatively short (5 -year)
planning period. Actual demands may fluctuate due to changing conditions.
Capacity Fees and Fee Revenue Current capacity fee schedules for both the water and
wastewater utilities are reflected in financial plan analyses. Capacity fee revenue is based
on both the amount of the capacity fees, as well as the amount of assumed new
development. It is assumed that the amount of`the water and wastewater capacity fees
will be adjusted annually to reflect change in construction inflation.
The City conducted at capacity fee study for the water and wastewater utilities in 2008.
That study indicates that approximately 56 percent of the water capacity fee is associated
with the cost of.constructing recycled water facilities (water supply component of the fee)
to meet long term potable demand. Because recycled water projects are funded out of the
wastewater utility, 56 percent of water capacity fee revenue is transferred from the water
capitatfund to the wastewater capital fund for this purpose.
The 2008 capacity fee study also indicates that approximately 67.5 percent of the
wastewater capacity fee is associated with the cost ofthe Ellis Creek WRF. As a result, it
is to direct.this portion of wastewater capacity fee revenue to repayment of the
SRF loan. The financial. plan model shows wastewater capacity fee revenue accruing to
the wastewater capital fund, and then 67.5 percent of annual revenue is transferred to the
wastewater operating fund to help cover the cost of annual SRF loan debt service.
• Water Supplies — The City receives the majority of its water supply from the SCWA. This
' supply is also supplemented with groundwater pumped from the City's wells. Due to
recent diversion limitations the City has increased the utilization of groundwater such that
at present about 12 percent of the water supply is from groundwater. Increasing the use
THE REED GROUP, INC. DRAFT - 10/27/2010 PAGE 15
WATER AND WASTEWATER
CITY OF PETALUMA FINANCIAL PLAN AND RATE STUDY
of groundwater has , also helped the City offset the higher costs of water purchases
resulting from increases in SCWA water rates '(groundwater is considerably less
expensive to produce than purchasing SCWA water). Based on direction from City staff
and in compliance with adopted ,General. Plan policies, the financial plan assumes that the
City will reduce its groundwater usage over the 5 -year planning period, relying 100 percent
on SCWA water by FY 14 -15. The City may rely on groundwater at times., however., for
emergency use and`to maintain the integrity�bad reliability of the well system.
• Unaccounted for Water Losses — The financial plan assumes an unaccounted for water
loss rate of 8'percent in future years. This is a normal range for water'utilitiesrand is
consistent with the City's 2005 Urban Water Management Plan. Increased monitoring
including assistance from ,the Petaluma Police Department is intended to maintain or
reduce this loss rate due to theft of water from Hydrants.
Storm Drainage Costs. The City has included storm drainage operating and maintenance'
costs (about $820,000 in FY 10 -11) in the 'wastewater utility due to the benefit received
from preventing storm (flood) waters from entering the wastewater collection system and
treatment•facilities. Separately, SCWA is currently funding Zone 2A (Petaluma Watershed
storm drainage system) operation and maintenance services at $875,500 and has
allocated $1,593,000 for identified projects in the Petaluma Watershed,
The City is currently conducting a study to assess the benefits to the wastewater utility of
the storm drainage program, as well as other beneficiaries. That study may result in a
reallocation of storm drainage costs to other functions and /or identify other ways for paying
for the program. For the purpose of this study, current storm drainage costs are shown to
be included within the wastewater utility.
Capital Improvement Plans
The City's current 5 -year capital improvement plans for the water and wastewater utilities are
reflected in' the financial, plans. Individual projects, project costs, and project timing are
summarized in Exhibit I1-3, and are shown in' current. dollars. Capital improvement projects are
funded through a combination of existing available reserves, water and wastewater rate revenues,
and 'water and wastewatercapacity'fee revenues. The financial plans presented herein include no
new borrowing for the purpose of funding capital, improvement projects. Planned recycled water
projects , are anticipated to be funded through the wastewater utility although, as described
previously, a portion,of water capacity fee revenue is used to help payfor recycled water projects.
The build out of the long -term recycled water'program is timed to coincide with the need to reduce
potable demand and availability of paying customers for the recycled water supply.
Capital project costs are carried forward, into the financial plan exhibits with the effects of inflation
added in such that project costs are shown in those exhibits in future dollars.
The demolition of the Hopper Street wastewater treatment plant is included in the City's 5 -year CIP
and shown in Exhibit 11 -3. 'However, the City is• exploring various options for the use of the
facility /property as well as the costs of demolition or alternative use. Because these issues require
further study and, exploration, the .planned demolition of the Hopper Street wastewater treatment
plant has been deferred for financial planning purposes until beyond the 5-year planning period.
Costs for this project shown in Exhibit II -7 (wastewater- capital fund) are for ongoing monitoring,
maintenance, and security of the closed facility.
THE REED GROUP, INC.
DRAFT — 10/27/2010 PAGE 16 1
WATER AND WASTEWATER
CITY OF'P- ETALUNIA FINANCIAL PLAN AND RATE STUDY
Exhibit II -3
City`of Petaluma -Department of Water Resources and Conservation
Timely implementation of certain wastewater projects is driven by regulatory agency direction in
response to sanitary sewer Overflows (SSO's). Future revisions to the capital improvement
program may result in different financial requirements for the utilities. Any system needs or
mandated improvements (not currently known) could alter the financial requirements of the utilities
over the five -year planning period.
Existing ;Debt-
The water -and wastewater utilities have a number of existing debt obligations (primarily
Wastewater). The financial plan reflects scheduled debt service payments, as well as requirements
for debt service coverage. Exhibit 11-4 summarizes annual debt obligations during the planning
period.
THE REED GROUP, INC.
DRAFT - 10/27/2010
PAGE l i
rive -rear �.a nai
-
--
Budget
Total
FY
10 -11
FY 11 -12
FY 12 -13
FY 13 -14
FY 14 -
Estimate
WATER PROJECTS (dotlafs in $000)
$
$
-
$
$
3,204
cbo50010i
Paula Lane Reservoir
$
-
$
$
2,451
S
$
$
$
2,155
C6740100i
E. Wash. St. (101 to Edith) 18 Water Main Replac
$
2;073
-
$
$
S
2,264
C67401002
E. Wash. St_. (Edith.to Bridge) 18" Water Main'Replac.
S
164
S
2;100
$
485
$
$
$
506
C67401003
E. Wash. SL North 18" Water Main Replac.
$
$
21
37
$
$
37
$
37
S
$
136
067401004
Pump Stations Emergency Power
$
25
S
$
-
$
-
S
90
$
90
067401005
Petaluma Blvd. North 12" Water Main Extension
$
$
$
$
1,350
$
-
$
1,350
067,401006
Casa ":Grande Road i6" Water Main Extension
$
$
-
265
$
265
$
265
$
840
C67401008
Water Main Replacements 2010 Various
$
15
S
1 5
300
$
S
300
$
300
$
300
S
1,703
067,500903
Automatic Meter Read Replacement
S
300
$
$
340
$
-
$
-
$
340
C67
Hardin Tank Exlenor,Recoating
$
-
$
-
$
$
S
280
067501608
2010 Urban Water Management Plan
S
280
$
$
TOTAL WATER PROJECTS
$
2,857
$
4,924
$
1,427
$
1,952
$
655
$
12,868
WASTEWATEWPROJECTS
(dollars in $000)
^
S
$
3,896
006500205
C Street Pump Station Upgrade
$
1,837
55
$
S
1,675
55
$
$
55
$
$
775
S
10,939
$
11,944
006500305
Demolition of Hopper Wastewater Treatment Facility
$
$
$
152,719
C00500402
Water Recycling Facility- Ellis Creek
$
510
$
421
$
350
.$
$
-
$
$
3,005
C00500406
SCADA Ellis Creek Water Recycling Facility
-
$
266
$
-
$
$
-
169
$
771
S
$
2,301
CD0501400
Wilmington Pump Station
$
-
S
$
1,361
"850
$
$
$
$
850
C66401001
Oxidation Pond,Levee Reinforcement
$
$
-
15
$
645
$
315
$
315
$
55
$
1,495
066401002
Sewer Main Replacementi2010 Various
$
S
$
-
$
-
$
S
367
066401003
10th St. Water & Sewer: Main, Replacement
237
-
-
$
-
$
$
1,555
c66401065
Mt. View Sewer Main Replk:- .Purrington to Pet. BI S
S
1,555
$
-
$
S
S
363
C66561002
Sewer Main Replacement 2010 Various
$
$
$
363
535
$
$
- .
535
$
$
-
535
$
535
$
2,664
C66501003
Manhole Rehabilitation
$
$
262
-
$
1,030
$
1.910
$
$
-
$
2,840
C66501004
Lift Station Upgrade
$'
30
S
340
$
-
$
$
$
3 7B
C66401101
Mt View Sewer MalnReplac:- Halsey to Glendon
$
$
$
C66401162
Pond Influent Pump Station. Grinder Installation
$
998
$
-
S
-
TOTAL WASTEWATER PROJECTS
$
7,275
$
3,334
$
2,396
$
11,529
$
185,467
RECYCLED WATER PROJECTS (dollarsin $000)
F51,785
$
$
$
7,958
006500406
Phase 2B Recycled Water Pipeline and Reservoir
S
7,502
$
$
$
$
4,322
C00500505
Phase,2A Recycled Water Pipeline
S
$
3,112
499
$
$
823
$
2,696
$
3;212
$
000500508
Phase Water Pipeline
S
785
$
$
$
-
$
1,065
C66400902
Recycled Water Pump Station'Main &1 Improv.
_
TOTAL RECYCLED WATER PROJECTS
$
610
$ 11,898
$
823
$
2,696
$
3,212
$
=20,625
Timely implementation of certain wastewater projects is driven by regulatory agency direction in
response to sanitary sewer Overflows (SSO's). Future revisions to the capital improvement
program may result in different financial requirements for the utilities. Any system needs or
mandated improvements (not currently known) could alter the financial requirements of the utilities
over the five -year planning period.
Existing ;Debt-
The water -and wastewater utilities have a number of existing debt obligations (primarily
Wastewater). The financial plan reflects scheduled debt service payments, as well as requirements
for debt service coverage. Exhibit 11-4 summarizes annual debt obligations during the planning
period.
THE REED GROUP, INC.
DRAFT - 10/27/2010
PAGE l i
CITY OF PETALUMA
WATER AND WASTEWATER
FINANCIAL PLAN RATE STUDY
Exhibit 11=4
City of�Petaluma — Department,of Water Resources and Conservation
Wastewater,Fund and Water Fund.Debt Service Payments for Fiscal Years 2011', through 201;5 (1)
Water Fund 6700 FYE (6/30)
20106
2011
2012
2013
2014
2015
Series 2001 B Principal
260,000.
275
.285,000
295,000
310,000
320 -000
Series 2001BInterest
388;563
378,123
366,923,
355
342;234`
328.214
Series 2001BTotal
648,563
653',123
651,923
650,138
652,234.
1 648,214
Total, Debt Service Water Fund 648 653,123 651,923. 650,138' 6521234 648;214
Wastewater Fund 6600 FYE (6130) 2910B 2011• 2012 2013 ;2014: 2015
Series 2000 Principal 4,10,000 435,000 455;000 480;060 505:000 530 ;OQ0
Sdrids 2000'Interest 308,374 288,694 267,488 244,738 - 220;738 -_ 1941983
Series`2000Total 718,374 723,694: 722,488' 724 ;738 725,738, 724'983
,
CWSRF Loan Principal 4,672,189 5:007 5;127,211 :5:250264 5;376;271 5,505:301
CWSRF LoaWIhterest 7,501,650 _ 2,850 2,730,2;17 2,607;164 2;481A58 2,352 „127
CWSRF Total 7501;650 .'7.B57,419 7,857,429 7,857;429 7;857:429 7,857;429
BNP Principal (8 -1 -2010 and•6 -1 -2011) (2) 1000;000 - -
BNP Interest and Fees 173,845 336;428,
BNP Total 173;845 15;636,428
Zions Principal (8 -1 -2010 and,6 -1 -2011) (2) 9,315,581
Zions Interest and Fees 222,695 .327;075
Zions Total 222,695 9;702,656 -
Estimates for•NewDebt•Issue (3)
Series 2011 Principal 240;000 255,000, 265;000 280;000
Series 2011 Interest 874;000 86200, 84 &000_ 834;000
Series,2011 Total 1,114 1,117;000 1 1,114,000
Total Debt Service Wastewater Fund 8;616,563 33,920,197 9,693;916 9;699,166 9,696,166 9,696,411
Notes:
(1) Source: Finance department for debt service payment schedules on existing debt.
(2) On July 1, 2010 the City repaid principal of $6;193,025 to BNP'�Paribas and $3,735,659 to ,Zions Bank from available: cash. .
On June 1, 2011 the?Cltyjs obliga_ ted repay principal of $9,106;975 to,BNP Paribas and '$5,639,992'to Zions Bank.
Proceeds,fromthe planned 2011 debt issuance are planned to be used for these later principaVrepayments,;as well as
accrue l t and fees estimated at 3237:920 for BNP Paribas and 5206`,797 for Zions Bank.
(3) New 2011debt ssue is intended to repay remaining principal balances due to LOG banks. _Estimates for this debt include:
Par Amount $:16,650,000
Interest Rate 5.25 %,
Term 30 years
Proceeds for LOG Payoff $15,200,000
Debt Service Reserve?Fund $ '1,117,000
Estimated Costs of lssuance $ 333,000
Existing long -term debt. obligations of the water utilityare summarized as follows:
• 2001 Water Revenue Bonds. These revenue bonds, had a par value of $10,165,000
when, issued. Annual debt service; payments are about $664,000'and will continue 'until
2031. The outstanding balance on,therevenue bonds $8,000,000. The revenue bonds
were issued. to, refund prior Certificates of participation acid 'to fund water system
improvements.
'Existing Iong -terra debt obligations of the wastewater utility are summarized as.follows:.
• 2000 Wastewater Revenue Bonds., These revenue bonds: had a par value of
$8;895,000 when issued. Annual debt Service payments are about $720,000 and will.
THE REEDsGROUP,, INC.
— 10/27/2010
PAGE 18 '
C
WATER,AND WASTEWATER
CITY OF
PEiALUMA
FINANCIAL-PLAN AND RATE STUDY
i continue until 2020. The outstanding balance: on the, revenue bonds is $5,525,000.. The
revenue bonds were issued to fund the Pond Influent Pump Station Upgrade Project, the
Disinfection Facility Upgrade Project, and planning and environmental documentation in
support of!the•Ellis Creek Water Recycling Facility Project:
2005 State Revolving Fund Loan from the State - Water.Resources Control Board.
The'City obtained a loan from the State in 2005 for nearly $126 million at an interest rate
of 2 4,percent to assist in construction"of the EIIis.Creek'WRF. As of,June.30,.201,0, about
$113,57.2,000 had been received by the City under the loan. The City expects to receive
another $9,300,000, as a .final reimbursement of costs, in FY 10-11. Annual loan
payments on the total loan balance -of $122,872,000 are estimated at nearly $7;857,000
with a 20 -year repayment term. Full principal' and interest payments under the SRF loan
commenced in April 2011.
2005 Revolving Lines of Credit. The City obtained "two revolving'lines , of credit in 2005
to assist with the financing of the Ellis "Creek WRF. This "bridge financing " 'was necessary
i because the SRF loan funding was not available until after construction of the Ellis Creek'
WRF began and the SRF loan could,�not be used to refund expenditures that occurred
prior to issuance of the'loan. In addition, the SRF loan would not cover all the anticipated
plant expenditures (such as expenditures for - builder's risk insurance coverage, laboratory
equipment, office furniture, and telephone systems), and annual disbursements of the
SRF loan were capped at $25 million, below the anticipated annual expenditures required
for construction ofthe project.
The agreement with the State Water Resources Control Board governing _the SRF loan requires
the City to maintain a user charge system sufficient to pay the total operation and maintenance
costs necessary for the proper operation, maintenance and replacement of treatment works, and
requires each recipient of'wastewater services to pay its proportionate share of the costs. Other
provisions of the'SRF loan agreement require the City to set rates suffrcientto yield net revenues
THE REED GROUP, INC. DRAFT - 10/27/2010 PAGE 19
o. BNP Paribas line of credit of $75 million By'the 'end of 2009, the City, had
borrowed $15:3 million against,the' line. of credit. The interest rate is variable and
interest costs were paid periodically. The loan was scheduled to mature with full
repayment of the amount borrowed due on August 1., 2010.
o Zions First National Bank.line of credit of. $25 million By-the end -of 2009, the City
'
had borrowed about $9.4 million againsuhe line; of credit. The interest rate for the
first,,year',is fixed at,3.88% and'vanab e' thereafter. Interest costs and fees were
paid periodically. The loan was scheduled to mature with full repayment of the
1
amount borrowed due on August 1, 2010.
Each of the City's long-term debt obligations are subject to debt agreements containing various
terms and conditions. Summarized 'below are some of the key debt covenants 'intended to
'
minimize risk of the City's creditors that are contained in the debt agreements.
The,2001 Water Revenue Bonds require the City to maintain charges for the water system during
'
h fiscal year which are sufficient to yield net revenues, excluding capacity fees, at least:equal`to
100 ppercent''of the water enterprise debt service, and net revenues including,capacity 'fees at least
equalto 125 percent of the water debt service.
The 2000 Wastewater Revenue Bonds require the City to maintain chargesfor the wastewater
system during each fiscal year which are sufficient to yield net revenues, excluding capacity fees,
. , at least equal to 100 percent of the wastewater enterprise debt - service, and net revenues including
capacity fees at least equal to 125 percent of the wastewater debt service.
The agreement with the State Water Resources Control Board governing _the SRF loan requires
the City to maintain a user charge system sufficient to pay the total operation and maintenance
costs necessary for the proper operation, maintenance and replacement of treatment works, and
requires each recipient of'wastewater services to pay its proportionate share of the costs. Other
provisions of the'SRF loan agreement require the City to set rates suffrcientto yield net revenues
THE REED GROUP, INC. DRAFT - 10/27/2010 PAGE 19
WATER AND WASTEWATER
CITY OF PETALUMA , FINANCIAL PLAN;AND,RATE;STU
equaLto the debt of the wastewater enterprise. The agreement also prohibitstheCity from
reducing wastewater service rates, unless'the net revenues from such : reduced rates:. will at all
times be sufficient to. meet` debt repayment obligations.
The City's loan agreements; with Zions' Bank and BNP Paribas require that the City impose
wastewater aservice rates and collect wastewater service revenuesi so that net revenues of the
wastewater enterprise, including capacity 'fee proceeds, equal at least 125 percent of the
enterprise's annual debt service obligations.
Extension, of the Repayment of LOCs
Under original terms of agreements, by, August.1, 2010•the City wasrequired to repay all amounts
borrowed against the two lines of °credit. Principal balances on the two lines of-credittotaled! about
$24.7• million (of the $1.00, illion available). The City had planned to issue new. longAdrm debt'
(mvenue,bonds),to pay off the lines „of'credit by the time the amounts bbrrowed'became due,:as
p
well as to obtain additional funds planned ca p. im p m for ital roveent Includin g the com plete
reconstruction of the "C” Street pump. station. However, the prospect of >a rollback 'in the
wastewater rates due to Measure U prevented the, City from issuing ,additional long -term debt..
Withoutthe necessary cash to pay off the 'LOCs, the City was faced with the possibility of default
on its financial obligations.
In July 2010, the City entered into agreements =with LOGbanks to restructurethe repayment of the
LOCs. On July 1., 2010 the City paid off principal balances of about $62 million to BNP ,Paribas .
and about: $3.7 million to Zions Bank. ,Remaining LOC balances are: due by June 1' 2011. To
enter into,'these agreements, the City agreed to•paya 1 percent restructuring fee on the balance to
'be extended, plus higherlinterestrates. At this time, the City plans to issue new longterm de,bt:in
2Q`11 in order to pay.off'the remaining LOC balances and finance the amount over a longer`period
of time.
The City has not,,yet begun the formal process�_of issuing new, debt. Thewastewater utility's current
cash balance is needed. for an operations reserve, and for 'part or all of several capital
P including pump, p9 P. 1
improvements, rneludin the "C° 'Street um , station' u rade ro ect, sewer maln.:r eplacement
projects, and the recycled, water' expansion program. Use of pas sh reserves to,paythe�line of'credit
debt would limit the City's ability to maintain an adequate operating reserve and to accomplish
needed capital improvements within the planned timeline.
Future Wastewater Utility, Long -Term. Debt
As mentioned above, the City- plans .to issue additional long -term, debt for the wastewater utility in
the spring of 2011 in order to repay remaining obligations associated with the LOCs. The City had_
considered, also :using the financing to finance additional capital projects. However, ,it appears that
additional debt to finance capital projects may not be necessary, within 'the ne5d five years.
Assumptions for the- 2011,debt issue are ,summarized in the footnotes of Exhibit,11=4.
c
Water Systehi f=inancial Plan
The, .water, system financial plan is an 'annual cash flow model that reflects beginning balances,
revenues and transfers in, expenditures and,transfers out, and,e.nding balancesfor each fund each
year of the planning period. The financial plan includes unaudited FY 09 -10 'revenues and
expendituresand then looks forward, based' on the budget for FY 10 -11,: Futute year operating and
maintenance expenses , are based on the FY '1'0 -11. `budget with adjustments for 'inflation and
growth. The water system financial plan model is presented! in' Exhibit 11 5.
THE REED GROUP INC. DRAFT - 10727/2010 PE