Loading...
HomeMy WebLinkAboutRESO 9601060322 sdl 6053681 Resolution No. 9601 Resolution of the Council of the City of Palo Alto Approving the FY 2017 Water Utility Financial Plan R E C I T A L S A. Each year the regularly assesses the financial position of its utilities with the goal of ensuring adequate revenue to fund operations. This includes making long­term projections of market conditions, the physical condition of the system, and other factors that could affect utility costs, and setting rates adequate to recover these costs. It does this with the goal of providing safe, reliable, and sustainable utility services at competitive rates. The City adopts Financial Plans to summarize these projections. B. The City uses reserves to protect against contingencies and to manage other aspects of its operations, and regularly assesses the adequacy of these reserves and the management practices governing their operation. The status of utility reserves and their management practices are included in Reserves Management Practices attached to and made part of the Financial Plans. The Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION 1. The Council hereby adopts the FY 2017 Water Utility Financial Plan. SECTION 2. The Council hereby approves the transfer of $4.7 million in FY 2016 from the Rate Stabilization Reserve to the Operations Reserve, as described in the FY 2017 Water Utility Financial Plan approved via this resolution. / / / / / / / / / / / / / / DocuSign Envelope ID: 7E693CB4-AFCE-4F2C-8D6E-EC47FB5F9F2D 060322 sdl 6053681 SECTION 3. The Council finds that the adoption of this resolution does not meet the California Environmental Quality Act a project under Public Resources Code Section 21065, and therefore, no environmental assessment is required. INTRODUCED AND PASSED: June 13, 2016 AYES: BURT, DUBOIS, FILSETH, HOLMAN, KNISS, SCHARFF, SCHMID, WOLBACH NOES: ABSENT: BERMAN ABSTENTIONS: ATTEST: City Clerk Mayor APPROVED AS TO FORM: APPROVED: Senior Deputy City Attorney City Manager Director of Utilities Director of Administrative Services DocuSign Envelope ID: 7E693CB4-AFCE-4F2C-8D6E-EC47FB5F9F2D FY 2017 WATER UTILITY FINANCIAL PLAN FY 2017 TO FY 2026 (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 2 | P a g e FY 2017 WATER UTILITY FINANCIAL PLAN FY 2017 TO FY 2026 TABLE OF CONTENTS Section 1: Definitions and Abbreviations................................................................................ 4 Section 2: Executive Summary and Recommendations ........................................................... 4 Section 2A: Overview of Financial Position .................................................................................. 4 Section 2B: Summary of Proposed Actions .................................................................................. 5 Section 3: Detail of FY 2017 Rate and Reserves Proposals ....................................................... 5 Section 3A: Rate Design ............................................................................................................... 5 Section 3B: Current and Proposed Rates..................................................................................... 6 Section 3C: Bill Impact of Proposed Rate Changes...................................................................... 8 Section 3D: Proposed Reserve Transfers ..................................................................................... 9 Section 4: Utility Overview.................................................................................................... 9 Section 4A: Water Utility History ................................................................................................. 9 Section 4B: Customer Base ........................................................................................................ 10 Section 4C: Distribution System ................................................................................................. 11 Section 4D: Cost Structure and Revenue Sources ...................................................................... 11 Section 4E: Reserves Structure................................................................................................... 12 Section 4F: Competitiveness ...................................................................................................... 12 Section 5: Utility Financial Projections ................................................................................. 13 Section 5A: Load Forecast .......................................................................................................... 13 Section 5B: FY 2011 to FY 2015 Cost and Revenue Trends ........................................................ 14 Section 5C: FY 2015 Results ....................................................................................................... 15 Section 5D: FY 2016 Projections ................................................................................................ 16 Section 5E: FY 2017­FY 2026 Projections ................................................................................... 16 Section 5F: Risk Assessment and Reserves Adequacy ............................................................... 18 Section 5G: Alternate Scenarios................................................................................................. 19 (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 3 | P a g e Section 5H: Long­Term Outlook ................................................................................................. 21 Section 6: Details and Assumptions ..................................................................................... 21 Section 6A: Water Purchase Costs............................................................................................. 21 Section 6B: Operations .............................................................................................................. 23 Section 6C: Capital Improvement Program (CIP)....................................................................... 24 Section 6D: Debt Service............................................................................................................ 27 Section 6E: Other Revenues ....................................................................................................... 28 Section 6F: Sales Revenues........................................................................................................ 28 Section 7: Communications Plan .......................................................................................... 28 Appendices ......................................................................................................................... 30 Appendix A: Water Utility Financial Forecast Detail ................................................................. 31 Appendix B: Water Utility Capital Improvement Program (CIP) Detail ..................................... 33 Appendix C: Water Utility Reserves Management Practices..................................................... 35 Appendix D: Description of WaterUtility Operational Activities............................................... 38 Appendix E: Sample of Water Utility Outreach Communications ............................................. 39 (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 4 | P a g e SECTION 1: DEFINITIONS AND ABBREVIATIONS BAWSCA Bay Area Water Supply and Conservation Agency CCF The standard unit of measurement for water delivered to water customers, equal to one hundred cubic feet, or roughly 748 gallons. CIP Capital Improvement Program CPAU City of Palo Alto Utilities Department O&M Operations and Maintenance RFC Raftelis Financial Consultants, Inc. SFPUC San Francisco Public Utilities Commission SFWD San Francisco Water Department UAC Utilities Advisory Commission WSIP The SFPUC’s Water System Improvement Program to seismically strengthen the transmission lines of the Hetch Hetchy regional water system. SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS This document presents a Financial Plan for the City’s Water Utility for the next ten years. This Financial Plan provides revenues to cover the costs of operating the utility safely over that time while adequately investing for the future. It also addresses the financial risks facing the utility over the short term and long term, and includes measures to mitigate and manage those risks. SECTION 2A: OVERVIEW OF FINANCIAL POSITION By FY 2026, costs for the Water Utility will increase 24% over FY 2016 levels, as shown in Table 1. Most of increase is related to the cost of water supplied by the San Francisco Public Utilities Commission (SFPUC), which is projected to rise 34% in that time due to the issuance of long term debt to finance major seismic improvements to the Hetch Hetchy transmission system. The cost of replacing the water mains in the City’s water distribution system has also increased substantially from the low costs seen during the recent recession, but is projected to remain relatively level during the forecast horizon. Staff projects only inflationary increases to most other costs over the forecast period. Table 1: Expenses for FY 2015 to FY 2026 (Thousand $’s) Expenses ($000) FY 2015 (act.) FY 2016 (est.) FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Water Purchases            Operations             Capital Projects             TOTAL            To cover these increases in costs, revenues (and therefore rates) need to increase over the next several years to balance costs and revenues. The rate trajectory shown in Table 2 assumes that (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 5 | P a g e the drought continues through 2017 and that consumption does not return to its pre­drought levels. Table 2 also compares current rate projections to those projected in last year’s Financial Plan. Table 2: ProjectedWater Rate Trajectory for FY 2017 to FY 2026 Projection FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Current 6% 9% 9% 6% 2% 2% 2% 3% 5% 3% Last year 8% 8% 8% 3% 1% 2% 3% N/A N/A N/A The Water Utility has a Rate Stabilization Reserve that can be used to smooth rate increases over several years. This Financial Plan projects that these reserves will be exhausted by the end of FY 2017. The Water Utility also has a Capital Improvement Program (CIP) Reserve that can be used to offset one­time unanticipated capital costs. This Financial Plan assumes that the CIP Reserve will be used for unanticipated capital expenses or returned to the Operations Reserve by the end of FY 2017. At that point the Emergency Water Supply and Storage Project and the Water System Master Plan will have been completed, so capital costs will be known with more certainty. Table 3 shows the projected reserve transfers over the forecast period. Table 3: Transfers To/(From) Reserves for FY 2016 to FY 2026 ($000) Reserve FY 2016 FY 2017 FY 2018 to FY 2026 Capital Improvement ­(4,000)­ Rate Stabilization (4,700) (1,867)­ Operations 4,700 5,867 ­ SECTION 2B: SUMMARY OF PROPOSED ACTIONS Staff proposes the following actions for the Water Utility in FY 2016: 1. Transfer $4.7 million from the Rate Stabilization Reserve to the Operations Reserve. See Section 3D: Proposed Reserve Transfers for more details. Staff proposes the following actions for the Water Utility in FY 2017: 1. Increase rates as shown in Section 3B: Current and Proposed Rates. These changes are projected to increase the system average rate by roughly 6%. 2. Transfer $1.867 million from the Rate Stabilization Reserve to the Operations Reserve. See Section 3D: Proposed Reserve Transfers for more details. 3. Transfer $4 million from the CIP Reserve to the Operations Reserve. SECTION 3: DETAIL OF FY 2017 RATE AND RESERVES PROPOSALS SECTION 3A: RATE DESIGN The Water Utility’s rates are evaluated and implemented in compliance with the cost of service requirements and procedural rules set forth in the California Constitution under Article 13 (per Proposition 218). Current rates were structured based on staff’s assessment of the financial (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 6 | P a g e position of the Water Utility, and updated using the methodology from the March 2012 Palo Alto Water Cost of Service & Rate Study by Raftelis Financial Consultants, Inc., as well as Raftelis’ 2015 memoranda updating the 2012 Study and analyzing drought rates (Staff Report 2676). Staff plans to review and update this cost of service study in 2 to 3 years, unless any major changes occur to the utility’s operations or customer base that would necessitate an earlier study. Before conducting any new cost of service study, staff will review current rates and the scope of the study with the Utilities Advisory Commission (UAC) and Council to determine the City’s policy priorities. SECTION 3B: CURRENT AND PROPOSED RATES The current rates and surcharges were effective on September 1, 2015. Rates were re­aligned to the results of an updated cost of service study, performed by Raftelis Financial Consultants, Inc. (RFC), which both developed the drought surcharges and reviewed the City’s water rate methodology and structure in light of recent court decisions interpreting the state constitution’s cost of service requirements. RFC examined and validated both the City’s methodology and rate structure as fundamentally sound, recommending only minor adjustments to ensure that peaking costs were equitably allocated to each customer class and residential rate tier. CPAU has five rate schedules: one for separately metered residential customers (W­1), one for commercial and master­metered multi­family residential customers (W­4), and specific schedules for irrigation­only services (W­7), services to fire sprinkler systems in buildings and private hydrants (W­3), and for service to fire hydrant rental meters used for construction (W­ 2). All customers pay a monthly service charge, based on the size of their inlet meter. This charge represents meter reading, billing, and other customer service costs, but also the cost of maintaining the capability to deliver a peak flow for that customer corresponding to their meter size. All customers are also charged for each CCF (one hundred cubic feet) of water used. Separately metered residential customers are charged on a tiered basis, with the first 0.2 CCF per day (6 CCF for a 30 day billing period) charged a base price per CCF, and all additional units charged a higher price per CCF. Commercial customers pay a uniform price for each CCF used, and a higher price for separately metered irrigation service. Table 4 and Table 6 show the current and proposed monthly service charges for all rate schedules. Staff evaluated grouping the smallest meter sizes (5/8”, 3/4” and 1” meters) into one charge category, but confirmed that there is a significant variation in actual demand on the water distribution system among customers using each of these water sizes. As such, staff is not recommending a change to the monthly service charge schedule. Table 5 shows the consumption charges. Table 7 shows the current and proposed drought surcharge levels. The basis for calculating these charges is staff’s annual assessment of the water utility’s financial position, as well as the cost of service methodology from the 2012 Palo Alto Water Cost of Service & Rate Study and 2015 update, prepared by RFC. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 7 | P a g e Table 4: Current and Proposed Monthly Service Charges Meter Size Monthly Service Charge ($/month based on meter size) Change Current (9/1/15) Proposed (7/1/16) $/mo % 5/8” $16.03 $16.77 $0.74 5% 3/4” $21.50 $22.60 $1.10 5% 1” $32.45 $34.26 $1.81 6% 1 ½” $59.83 $63.40 $3.57 6% 2” $92.67 $98.37 $5.70 6% 3” $196.70 $209.11 $12.41 6% 4” $350.00 $372.31 $22.31 6% 6” $716.82 $762.81 $45.99 6% 8” $1,319.07 $1,403.94 $84.87 6% 10” $2,085.57 $2,219.92 $134.35 6% 12” $2,742.56 $2,919.34 $495.89 6% Table 5: Current and Proposed Water Consumption Charges Current (9/1/15) Proposed (7/1/16) Change $/CCF % W­1 (Residential) Volumetric Rates ($/CCF) Tier 1 Rates 5.93 6.30 0.37 6% Tier 2 Rates 8.38 8.82 0.44 5% W­2 (Construction) Volumetric Rates ($/CCF) Uniform Rate 6.92 7.32 0.40 6% W­4 (Commercial) Volumetric Rates ($/CCF) Uniform Rate 6.92 7.32 0.40 6% W­7 (Irrigation) Volumetric Rates ($/CCF) Uniform Rate 8.29 8.72 0.43 5% Table 6: Current and Proposed Monthly Fire Service Charges Meter Size Monthly Service Charge ($/month based on meter size) Change Current (9/1/15) Proposed (7/1/16) $/mo % 2” $3.43 $3.79 $0.36 10% 4” $21.22 $23.42 $2.20 10% 6” $61.63 $68.03 $6.40 10% 8” $131.34 $144.97 $13.63 10% 10” $236.20 $260.70 $24.50 10% 12” $381.52 $421.11 $39.59 10% (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 8 | P a g e Table 7: Current and Proposed Drought Surcharge Charges Current (9/1/15) Proposed (7/1/16) Change $/CCF % 10%/15% Reduction ($/CCF) W­1 Residential (Tier 1) 0.19 0.20 $0.01 5% W­1 Residential (Tier 2) 0.55 0.58 0.03 5% W­4 (Non­residential and Master Metered Multi­Family) 0.24 0.26 0.02 8% W­7 (Irrigation) 0.51 0.53 0.02 4% 20% Reduction ($/CCF) W­1 Residential (Tier 1) 0.39 0.43 0.04 10% W­1 Residential (Tier 2) 1.14 1.21 0.07 6% W­4 (Non­residential and Master Metered Multi­Family) 0.49 0.53 0.04 8% W­7 (Irrigation) 1.18 1.25 0.07 6% 25% Reduction ($/CCF) W­1 Residential (Tier 1) 0.59 0.64 0.05 8% W­1 Residential (Tier 2) 1.76 1.85 0.09 5% W­4 (Non­residential and Master Metered Multi­Family) 0.72 0.77 0.05 7% W­7 (Irrigation) 1.93 2.02 0.09 5% SECTION 3C: BILL IMPACT OF PROPOSED RATE CHANGES Table 8 shows the impact of the proposed July 1, 2016 rate changes on the median residential bill. The average increase is roughly 6%, but some customers may see slightly higher or lower increases due to slight changes in the composition of the utility’s costs. Table 8 is presented assuming continued activation of the drought surcharge at the 20% reduction level. Table 8: Impact of Proposed Water Rate Changes on Residential Bills Usage (CCF/month) Bill under Current Rates (9/15/15) Bill under Proposed Rates (7/1/16) Change $/mo. % 4 $ 41.31 $ 43.69 $ 2.38 6% (Winter median) 7 63.47 67.18 3.71 6% (Annual median) 9 82.51 87.24 4.73 6% (Summer median) 14 130.11 137.39 7.28 6% 25 234.83 247.72 12.89 5% Table 9 shows the impact of the proposed July 1, 2016 rate changes on various representative commercial customer bills. This comparison includes continuation of the drought surcharge at the 20% reduction level. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 9 | P a g e Table 9: Impact of Proposed Water Rate Changes on Commercial Bills Usage (CCF/month) Bill under Current Rates (9/15/15) Bill under Proposed Rates (7/1/16) Change $/mo. % Commercial (W­4) (5/8” meters) (Annual median) 12 $ 104.95 110.97 6.02 6% (Annual average) 64 490.27 519.17 28.90 6% Irrigation (W­7) (1 ½” meters) (Winter median) 9 145 153 8 6% (Summer median) 37 410 432 22 5% (Winter average) 56 590 622 32 5% (Summer average) 199 1,944 2,047 103 5% SECTION 3D: PROPOSED RESERVE TRANSFERS In the FY 2016 Financial Plan, several transfers between reserves were discussed for FY 2016. CIP related funds were transferred out of the Reappropriations Replacement into the CIP Reserve, and $5.5 million was proposed to be transferred from the Rate Stabilization Reserve into the Operations Reserve. Due to the long running drought in California, and as lower expenses in FY 2015 resulted in higher ending reserve balances than initially projected, staff recommends reducing the $5.5 million transfer from the Rate Stabilization Reserve in FY 2016 to $4.7 million, and proposes transferring $1.87 million in FY 2017. This transfer will exhaust the Rate Stabilization Reserve, as planned for and discussed in Section 4E: Reserves Structure, and is included in the financial projections in this Financial Plan. It will enable CPAU to maintain adequate Operations Reserve levels while moderating the pace of increase in water rates. A proposed $4 million transfer from the CIP Reserve to the Operations Reserve was also discussed in the FY 2016 Financial Plan. This transfer will help fund the Operations Reserve, as well as bring the CIP Reserve closer to its target reserve level. The impact of these transfers on reserves levels can be seen in Section 4E: Reserves Structure and Appendix A: Water Utility Financial Forecast Detail. SECTION 4: UTILITY OVERVIEW This section provides an overview of the utility and its operations. It is intended as general background information and to help readers better understand the forecasts in Section 5: Utility Financial Projections and Section 6: Details and Assumptions. SECTION 4A: WATER UTILITY HISTORY The Water Utility was established on May 9, 1896, two years after the city was incorporated. Voters of the 750 person community approved a $40,000 bond to buy local, private water companies who operated one or more shallow wells to serve the nearby residents. The city grew and the well system expanded until nine wells were in operation in 1932. Palo Alto began (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 10 | P a g e receiving water from the San Francisco Water Department (SFWD) in 1937 to supplement these sources. A 1950 engineering report noted, “the capricious alternation of well waters and the San Francisco Water Department water…has made satisfactory service to the average customer practically impossible”. By 1950, only eight wells were still in operation. Despite this, groundwater production increased in the 1950’s leading to lower groundwater tables and water quality concerns. In 1962, a survey of water softening costs to CPAU customers determined that CPAU should purchase 100% of its water supply needs from the SFWD. A 20­year contract was signed with San Francisco, and CPAU’s wells were placed in standby condition. The SFWD later became known as the SFPUC. Since 1962 (except for some very short periods) CPAU’s entire supply of potable water has come from the SFPUC. As the city grew, so did the number of mains in the water system. The system of mains expanded along with the town, while existing sections of the system continued to age. In the mid­1980s, the number of breaks in cast iron mains installed during the 1940s and earlier started to accelerate. In FY 1994, to combat deterioration of older sections of the system, an analysis of cost effective system improvements was performed and the rate of main replacement was increased from one mile per year to three. A plan to replace 75 miles of deficient mains within 25 years was begun. In 1999, a study of system reliability concluded that major upgrades were needed to the distribution system to provide adequate water supply during a natural disaster. This ultimately resulted in the $40 million Emergency Water Supply and Storage Project, nearly completed, which involved a new underground reservoir in El Camino Park, the siting and construction of several emergency supply wells, and the upgrade of several existing wells and the Mayfield pump station. At the same time that CPAU was evaluating the reliability of its own system, the SFPUC, in consultation with BAWSCA members, was evaluating the reliability of the Hetch Hetchy water system, which crosses two major fault lines between the Sierras and the Bay Area. That evaluation concluded that major upgrades to the system were required. This planning process culminated in the SFPUC’s $4.8 billion Water System Improvement Project (WSIP), which is ongoing. SECTION 4B: CUSTOMER BASE CPAU’s Water Utility provides water service to the residents and businesses of Palo Alto, plus a handful of residential customers not in Palo Alto (Los Altos Hills, primarily). Nearly 20,300 customers are connected to the water system, approximately 16,500 (81%) of which are separately metered residential customers and 3,800 (19%) of which are commercial, master­ metered residential, irrigation and fire service customers. Judging from seasonal consumption patterns, between 35% and 50% of Palo Alto’s water is used for irrigation, and that consumption is heavily weather dependent. It also varies significantly by season. As a result of these two factors, there is significant variability in the amount of water that is demanded from the system month to month and year to year. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 11 | P a g e Figure 1: Cost Structure (FY 2015) Figure 2: Revenue Structure (FY 2015) 93% 7% Sales of Water Other Revenue SECTION 4C: DISTRIBUTION SYSTEM To deliver water to its customers, the utility owns roughly 233 miles of mains (which transport the water from the SFPUC meters at the city’s borders to the customer’s service laterals and meters), eight wells (to be used in emergencies), five water storage reservoirs (also for emergency purposes) and several tanks used to moderate pressure and deal with peaks in flow and demand (due to fire suppression, heavy usage times, etc.). These represent the vast majority of the infrastructure used to distribute water in Palo Alto. SECTION 4D: COST STRUCTURE AND REVENUE SOURCES As shown in Figure 1, water purchase costs accounted for roughly 39% of the Water Utility’s costs in FY 2015. Operational costs represented roughly 40%, and capital investment was responsible for the remaining 21%. Water purchase costs are projected to rise to roughly 41% of costs by FY 2026. The Water Utility receives 93% of its revenue from sales of water and the remainder from capacity and connection fees, interest on reserves, and other sources. As rates increase over the next several years, the percentage of revenue from sales of water is expected to increase as well. Appendix A: Water Utility Financial Forecast Detail shows more detail on the utility’s cost and revenue structures. Roughly 15% of the utility’s revenues come from fixed service charges, though most of its costs are fixed. This is typical for California water utilities, and conforms to the Best Management Practices (BMPs) of the California Urban Water Conservation Council (CUWCC), a statewide conservation council of environmental groups, state agencies, and water utilities to which the City is a signatory. One of CUWCC’s BMPs is that a utility’s revenue from fixed service charges constitutes at most 30% of the utility’s total revenue from all charges 1. 1 See http://www.cuwcc.org/Resources/Memorandum­of­Understanding/Exhibit­1­BMP­Definitions­Schedules­ and­Requirements/BMP­1­Utility­Operations­Programs (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 12 | P a g e SECTION 4E: RESERVES STRUCTURE CPAU maintains six reserves for its Water Utility to manage various types of contingencies. These are summarized below, but see Appendix C: Water Utility Reserves Management Practices for more detailed definitions and guidelines for reserve management: Reserve for Commitments: A reserve equal to the utility’s outstanding contract liabilities for the current fiscal year. Most City funds, including the General Fund, have a Commitments Reserve. Reserve for Reappropriations:A reserve for funds dedicated to projects reappropriated by the City Council, nearly all of which are capital projects. Most City funds, including the General Fund, have a Reappropriations Reserve. Capital Improvement Program (CIP) Reserve:The CIP reserve can be used to accumulate funds for future expenditure on CIP projects and is anticipated to be empty unless a major one­time CIP expenditure is expected in future years. This CIP can also act as a contingency reserve for the CIP. This type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as well. Rate Stabilization Reserve: This reserve is intended to be empty unless one or more large rate increases are anticipated in the forecast period. In that case, funds can be accumulated to spread the impact of those future rate increases across multiple years. This type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as well. Operations Reserve: This is the primary contingency reserve for the Water Utility, and is used to manage yearly variances from budget for operational water supply costs. This type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as well. Unassigned Reserve: This reserve is for any funds not assigned to the other reserves and is normally empty. SECTION 4F: COMPETITIVENESS Table 10 shows the current water bills for residential customers compared to what they would be under surrounding communities’ rate schedules. CPAU has the highest monthly bills of the group, although bills for smaller water users are less than in some surrounding communities. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 13 | P a g e Table 10: Residential Monthly Water Bill Comparison Usage (CCF/month) Residential monthly bill comparison ($/month)* As of February 2016 Palo Alto Menlo Park Mountain View Hayward Redwood City Santa Clara 4 41.31 44.11 31.46 28.68 43.69 16.64 (Winter median) 7 63.47 62.25 48.77 48.42 57.13 29.12 (Annual median) 9 82.51 74.36 60.31 61.58 66.77 37.44 (Summer median) 14 130.11 106.12 89.16 96.24 95.46 58.24 25 234.83 176.80 187.23 181.49 182.14 104.00 * All comparisons use the 5/8” meter size. SECTION 5: UTILITY FINANCIAL PROJECTIONS SECTION 5A: LOAD FORECAST Figure 3 shows 40 years of water consumption history. Average water use has trended downward over time even as Palo Alto’s population has grown. Significant water use reductions over the 40­year history were in response to requests to reduce water use in the 1976­77 and 1988­92 drought periods. During these periods, customers invested in efficient equipment and modified behavior to achieve the water reduction goals. More recently, water sales decreased substantially during the 2007­2009 recession and during the current drought. Water use is down by similar amounts among both commercial and residential customers. Both summertime and wintertime use have decreased for all customer classes. Figure 3: Historical Water Consumption (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 14 | P a g e Figure 4 shows the forecast of water consumption through FY 2026, as denoted by the dotted line. Figure 4: Forecast Water Consumption Palo Alto is currently experiencing drought conditions with State mandated 24% water use restrictions in effect. The current forecast assumes current conditions continue through FY 2017, with the drought easing in spring of 2017. It also assumes consumption only returns to 50% of its pre­drought levels, which is consistent with patterns experienced in prior droughts. SECTION 5B: FY 2011 TO FY 2015 COST AND REVENUE TRENDS Figure 5 and the tables in Appendix A: Water Utility Financial Forecast Detail show how costs have changed during the last five years as well as how they are projected to change over the next decade. The annual expenses for the water utility rose substantially between 2011 and 2015. The increases were primarily related to water purchase costs, which increased 47% from $10.7 million in FY 2011 to $15.7 million in FY 2014. A more in­depth discussion of water purchase costs will be found in Section 6A: Water Purchase Costs. Operations cost increased by about 3% annually, while CIP costs stayed relatively flat, except in FY 2013 when there was a hold on new CIP spending to permit completion of a backlog of projects. This budgetary hold allowed for backlogged water main replacement projects to be started, which consumed surplus capital reserves. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 15 | P a g e Figure 5: Water Utility Expenses, Revenues, and Rate Changes: Actual Costs through FY 2015 and Projections through FY 2026 SECTION 5C: FY 2015 RESULTS In early 2014, when proposing rate adjustments to be effective on July 1, 2014, staff forecast the need for a 4% rate increase. However, higher sales in FY 2014, and projected increased sales in FY 2015 increased reserves such that no rate change was needed for FY 2015. Forecast revenues for FY 2015 were actually $41.2 million instead of the projected revenues of $36.4 million. The largest reason for this was a return of funds related to a return of CIP funds. Connection and capacity fees were, and have continued to be, higher than forecast. Actual expenses for FY 2015 were $40.1 million compared to the projected expenses of $38.7 million. Table 11 summarizes the variances from forecast. Actual Projected (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 16 | P a g e Table 11: FY 2015, Actual Results vs. 2014 Forecast Net Cost/ (Benefit) Type of change Return of capital project funds ($2,667,000) Revenue increase Connection and capacity fees higher than forecast ($1,043,000) Revenue increase Water supply costs lower than expected (700,000) Cost savings Other revenues (interest income, etc.) were higher than forecasted ($1,152,000) Revenue increase Operations costs lower than expected (1,300,000) Cost savings Capital project costs higher than projected 3,500,000 Cost increase Net Cost / (Benefit) of Variances ($3,362,000) SECTION 5D: FY 2016 PROJECTIONS Several factors have contributed to changes between last year’s forecast and this year’s projections. Most notably, the ongoing drought has reduced projected FY 2016 sales by around 12%. The activation of a drought rate surcharge in September 2015, however, means that FY 2016 revenues are projected to be only 4.6% lower than forecast. On the cost side, reduced purchases and lower than forecast wholesale supply rates from the SFPUC are expected to result in supply cost decreases of 13.7% for FY 2016. Notable are projected CIP cost increases of $2.3 million, or 26%, mainly due to general cost increases and completing some projects. Table 12 summarizes the changes from last year’s forecast. Table 12: FY 2016 Change in Projected Results, 2016 Forecast vs 2017 Forecast Net Cost/ (Benefit) Type of change Lower purchase costs ($2,809,000) Cost savings Higher misc. revenues (interest income, fees) ($111,000) Revenue increase Lower sales revenue $2,039,000 Revenue decrease Capital project costs higher than projected $2,315,000 Cost increase Higher Operations budgets $163,000 Cost increase Net Cost / (Benefit) of Variances $1,507,000 SECTION 5E: FY 2017 ­FY 2026 PROJECTIONS As can be seen in Figure 5 above, costs for the Water Utility are not projected to change significantly between FY 2016 and FY 2017. However, as discussed earlier, water supply costs are the main reason for the cost increases. Water supply costs are projected to increase by 7% in FY 2017 and grow steadily over the coming years. Operations costs include will increase by $1 million in FY 2017 for emergency generator leasing and maintenance, but will otherwise roughly match inflation through the forecast period. Capital investment costs are also expected to increase at the same rate of inflation used in the City’s long­term financial plans (2.5 to 3%/year), though there is still uncertainty with regard to the utility’s future costs for main replacement. See Section 6: Details and Assumptions for more detail on the costs that make up these projections, as well as the various assumptions underlying the projections. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 17 | P a g e Revenues are below expenses and will require annual rate increases between 6% and 9% through FY 2020 to keep up with these cost increases even with the use of the Rate Stabilization Reserve to spread the increases over multiple years. Costs have already increased substantially over the last few years, and revenues have not kept pace. Sales revenues were adequate in FY 2014 due to lower than average CIP expenditures in that year, but starting in FY 2015 deficits are forecast. To help close this gap, revenues were increased by 12% in FY 2016. Reserves trends based on these revenue projections are shown in Figure 6 below. The Rate Stabilization Reserve is projected to have a zero balance by the end of FY 2017, and the CIP Reserve is projected to decrease by $4 million by the end of FY 2017. Assuming these increases in revenue, the Operations Reserve, the main contingency reserve, is expected to remain above the minimum reserve level and will be adequate to meet all identified risks, as discussed in Section 5F: Risk Assessment and Reserves Adequacy. These projections assume that drought restrictions end in FY 2017, and that the request for water usage reductions remains at 24%. If the drought worsens or continues longer than projected, the level of the drought surcharge currently in place may need to be reviewed. The forecast also assumes that water main replacement project costs do not increase by more than inflation. This is a major uncertainty as staff awaits the results of the Water Master Plan study to determine the advisable water main replacement strategy. Figure 6: Water Utility Reserves Actual Reserve Levels through FY 2015 and Projections through FY 2026 (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 18 | P a g e SECTION 5F: RISK ASSESSMENT AND RESERVES ADEQUACY The Water Utility currently has one contingency reserve, the Operations Reserve, and this Financial Plan maintains reserves within the approved reserve maximum and minimum guidelines throughout the forecast period, as shown in Figure 7. Reserve levels also exceed the short term risk assessment for the utility. Note that while the Operations Reserve is above the target level in FY 2017, it falls to below the target (but above the minimum) in FY 2018 through FY 2020. Figure 7: Operations Reserve Adequacy Table 13 summarizes the risk assessment calculation for the Water Utility through FY 2021. The same methodology is used for FY 2022 through FY 2026 as well. The risk assessment includes the revenue shortfall that could accrue due to: 1. Lower than forecasted sales revenue; and 2. An increase of 10% of planned system improvement CIP expenditures for the budget year. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 19 | P a g e Table 13: Water Risk Assessment ($000) FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 Total non­commodity revenue $18,406 $20,744 $23,233 $24,976 $25,226 Max. revenue variance, previous ten years 13%13%13%13%13% Risk of revenue loss $1,819 $2,050 $2,296 $2,468 $2,492 CIP Budget $10,216 $10,012 $10,252 $10,555 $10,867 CIP Contingency @10%$1,022 $1,001 $1,025 $1,056 $1,087 Total Risk Assessment value $2,840 $3,051 $3,321 $3,523 $3,579 SECTION 5G: ALTERNATE SCENARIOS At the UAC’s February 2016 meeting, it was suggested that staff prepare two alternate scenarios for rate increases. The first (“Target”) scenario keeps the Operations Reserve at or near the Target level throughout the forecast period as shown in Figure 8 below. The second (“Minimum”) has no rate change in FY 2017 and lets the Operations Reserve stay at minimum for five years as shown in Figure 9 below. Both options as well as the proposed rate adjustments are shown in Table 14. Table 14: Projected Water Rate Trajectory for FY 2017 to FY 2026 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Proposed 6% 9% 9% 6% 2% 2% 2% 3% 5% 3% Target 3% 20% 3% 2% 3% 3% 2% 4% 2% 4% Minimum 0% 18% 7% 3% 3% 4% 3% 4% 3% 4% The Target scenario requires a 3% rate increase (smaller than the proposed 6% increase) in FY 2017, but requires a very large rate increase (20%) in FY 2018 to make up for another year with a significant deficit with revenues not covering costs. The level of the Operations Reserve in the target scenario is shown in Figure 8 below. The Minimum scenario also requires a significant rate increase (18%) in FY 2018 if no rate change is implemented in FY 2017 with a large (7%) rate increase required for FY 2019. The level of the Operations Reserve in the target scenario is shown in Figure 9 below. Staff recommends a 6% water rate increase in FY 2017 to moderate the rate increases that are projected in FY 2018 while keeping the Water Operations Reserve at healthy levels. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 20 | P a g e Figure 8: Operations Reserve at Target Level Figure 9: Operations Reserve at Minimum for FY 2018 through FY 2021 (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 21 | P a g e SECTION 5H: LONG ­TERM OUTLOOK CPAU has put its Water Utility on strong footing by investing in its distribution system infrastructure and emergency water facilities over the last 20 years. The Water System Master Plan, currently under review, will give CPAU a better picture of the long­term outlook for its infrastructure and will result in a plan for an appropriate schedule for infrastructure replacement and upgrades. In addition, CPAU’s water supplier, the SFPUC, has replaced and seismically strengthened its water transmission infrastructure, which will benefit Palo Alto and all Hetch Hetchy customers over the long term. The opportunities for CPAU’s Water Utility over the long term may be in alternative water supplies such as recycled water, groundwater, and water from the Santa Clara Valley Water District. These alternatives have been analyzed in the past, and will be analyzed again in an upcoming update to the Water Integrated Resource Plan. Some of these alternatives may provide cost savings or increased drought protection. Climate change may begin to present challenges for the Water Utility over the next 20 to 40 years. Availability of water from SFPUC’s Regional Water System may change with changing seasonal precipitation patterns. Water consumption patterns may change. Consumption could increase due to drier weather or decrease as customers become even more focused on water conservation. Droughts may become more frequent. The risk of wildfire in the foothills could increase, possibly threatening utility infrastructure or placing greater demands on it. Sea level rise could result in greater exposure of utility infrastructure to saltwater intrusion or the need to protect infrastructure from inundation, possibly resulting in higher maintenance and replacement costs. It could also affect the groundwater aquifer that the utility relies on in emergencies. Any of these could result in increases to the costs of operating the Water Utility. As part of the Sustainability/Climate Action Plan, CPAU is currently working on a Climate Change Adaptation Roadmap that will begin to assess some of these risks. SECTION 6: DETAILS AND ASSUMPTIONS SECTION 6A: WATER PURCHASE COSTS CPAU purchasesall of the potable water supplies from the SFPUC, which owns and operates the Hetch Hetchy Regional Water System. CPAU is one of several agencies that purchase water from the SFPUC, all of whom are members of the Bay Area Water Supply and Conservation Agency (BAWSCA). Palo Alto uses roughly 7% of the water delivered by the SFPUC to BAWSCA member agencies. The Hetch Hetchy Regional Water System system begins with a system of reservoirs and tunnels in the high Sierra in Yosemite County and is transported by a gravity­fed pipeline to the Bay Area. Currently, the SFPUC is in the midst of a $4.8 billion bond­financed capital improvement program (the Water System Improvement Program, or WSIP) to seismically retrofit the facilities that transport water to the Bay Area. This has resulted in large increases in the annual debt service costs assigned to wholesale customers like Palo Alto. The wholesale customer debt service share of the WSIP is increasing from $53 million in FY 2010 to over $200 (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 22 | P a g e million in FY 2020. As a result, the SFPUC’s wholesale water rate has already increased from $1.43 per CCF in FY 2009 to $3.75 per CCF in FY 2016, and is forecasted to increase to over $5.00 per CCF by FY 2025. Figure 10 shows the SFPUC’s actual wholesale water rate since FY 2009 and a projection through FY 2026. Note that the wholesale water rate decreased in FY 2014, but the apparent rate decrease is due to a part of the debt being directly paid by the BAWSCA agencies. This cost is paid in addition to the wholesale water rate and add about $0.35 to $0.45 per CCF to the wholesale rate. The SFPUC’s water rate projections show a less steeply increasing rate trajectory after all of the debt for the WSIP has been issued. Parts of SFPUC’s system not included in the WSIP also may need rehabilitation. Some of these projects are already included in the SFPUC’s rate projections, but the SFPUC is conducting condition assessments of other “up­country” facilities, located in the Sierras in the coming years. If the these assessments identify other facilities that need replacement, it may result in additional rate increases beyond FY 2020 as new debt is issued to finance the projects. In January 2016, the SFPUC provided a range for FY 2017 wholesale water rates of between $4 and $5 per CCF. In February, the SFPUC updated its estimate for FY 2017 to $4.05/CCF, but there is much uncertainty surrounding the length of the drought and water usage by the BAWSCA agencies. Since the State has mandated water use reductions for most BAWSCA agencies by 20% or more, SFPUC’s rates will invariably need to increase since its costs are almost entirely fixed with no relation to the quantity of water that delivered by the system. As shown in Figure 10, this year’s projection of SFPUC wholesale rates has increased from the previous year’s projection. If the drought ends in FY 2017 and sales increase (or at least don’t decline further), then rate projections may level out. However, if snow and rain do not materialize, current calls for restricted usage may continue or even be increased. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 23 | P a g e Figure 10: Historical and Projected SFPUC Wholesale Water Rate SECTION 6B: OPERATIONS CPAU’s Water Utility operations include the following activities: Administration, a category that includes charges allocated to the Water Utility for administrative services provided by the General Fund and for Utilities Department administration, as well as debt service and other transfers. Additional detail on Water Utility debt service is provided in Section 6D: Debt Service Customer Service Engineering work for maintenance activities (as opposed to capitalactivities) Operations and Maintenance of the distribution system; and ResourceManagement Appendix D: Description of Water Utility Operational Activities includes detailed descriptions of the work associated with each of these activities. From FY 2011 to FY 2015 Operations costs (excluding debt service, rent, and transfers) increased 3.5% per year on average (see Figure 11). The increases were driven by allocated charges, which increased by 7% per year on average and increases in other Operations costs, which increased by roughly 4% per year. Debt service costs increased by $2.4 million per year as a result of a bond issued to finance the Emergency Water Supply and Storage Project. Transfers (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 24 | P a g e have varied from year to year, but are expected to remain relatively low and stable through the forecast period. In FY 2017 Operations costs are projected to increase by $1 million for a capital lease of emergency generators for various wells and pump stations. This is a new ongoing cost. Aside from that, only inflationary increases are projected for Operations costs. Underlying these projections are assumptions for salary and benefit costs, consumer price index, and other cost projections that match the City’s long­range financial forecast. Figure 11: Historical and Projected Operational Costs SECTION 6C: CAPITAL IMPROVEMENT PROGRAM (CIP) The Water Utility’s CIP consists of the following types of projects: Customer connections, which represents the cost when the Water Utility installs new services or upgrades existing services at a customer’s request in response to development or redevelopment. CPAU charges a fee to these customers to cover the cost of these projects. Ongoing projects, which represent the cost of replacing aging and under­recording meters and degraded boxes and covers, minor replacements of various types of distribution system equipment, and the cost of capitalized tools and equipment. Actual Projected (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 25 | P a g e One time projects, or large, non­recurring replacement of system assets (such as reservoir rehabilitation) Water main replacement, which represents the ongoing replacement of aging water mains, and sometimes the services associated with those mains. Table 15 shows the FY 2016 adopted budget, with actual spending and remaining budget as of December 31, 2015. Also included is the five year CIP spending plan, although these figures are preliminary pending budget discussions starting in May. The ‘committed’ column represents funds committed to contracts for which work has not yet been completed or invoices paid. Table 15: Budgeted Water Utility CIP Spending ($000) *Includes unspent funds from previous years carried forward or reappropriated into the current fiscal year **Equal to Reserve for Reappropriations + Reserve for Commitments. The water main replacement program funds the replacement of deteriorating water mains. The water system consists of over 236 miles of mains, approximately 2000 fire hydrants, and over 20,000 metered service connections spanning 9 pressure zones over a 26 square mile service area. CPAU utilizes an asset management database in conjunction with hydraulic modeling software to prioritize capital improvements. Mains are selected by researching the maintenance history of the system and identifying those that are undersized, corroded, and subject to recurring breaks. CPAU uses a scoring system based on criticality in order to prioritize which mains to replace first, and coordinates with the Public Works street maintenance program to avoid cutting into newly repaved streets. CPAU replaces approximately 3 miles of main per year, or 1.3% of the system. Costs for the water main replacement program are increasing for a variety of reasons: Fire Code regulations now mandate fire sprinklers for new residential units. To accommodate increased fire flows, new main replacement projects require larger diameter pipe. CPAU has switched to high­density polyethylene (HDPE) for its mains. Installation costs for this material are slightly higher, though lifecycle costs are lower, and the material performs better. Joints in distribution mains are the most likely place for failure, and sections of HDPE pipe can be fused together rather than connected with fittings. In the long run, this will reduce losses and maintenance costs. To take full advantage of HDPE’s fusibility, CPAU is now replacing the services along with the water mains with new HDPE services. In the past, the existing services were reconnected, regardless of the material. This new practice costs more in the short run, but will provide long term benefits. Lastly, costs have escalated after the recession. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 26 | P a g e These factors have created some uncertainty in future water main replacement costs. If the cost of water main replacement continues at its current levels, water main replacement budgets will need to be increased by $1M to $2M per year to keep up the current pace of main replacement. However, CPAU is nearing the end of a long term water main replacement program initiated in 1993 to replace the oldest and most degraded parts of the system. Roughly 25% of the system has been replaced, and the rate of water leaks has decreased 50%. This makes it a good time to re­evaluate the program. CPAU initiated a master planning process in FY 2015 to evaluate the current state of the distribution system and determine the necessary rate of main replacement in future years. Currently the utility replaces about 1.3% of the system each year, which is an 80­year replacement cycle. The master planning process may reveal a need for a higher main replacement rate, or may reveal that pipes are currently in good condition and a lower rate of replacement is sufficient. Results are being reviewed and follow up questions prepared. If this study determines that a lower rate of main replacement is acceptable, increases to water main replacement project budgets may not be necessary. Likewise, if the per­mile costs of main replacement come down, that would also reduce or eliminate the need to increase main replacement budgets. A combination of reduced costs and a reduced rate of main replacement could even allow CPAU to reduce those budgets. However, if per­mile main replacement costs stay at their current levels and the study reveals the need to maintain the same rate of main replacement (or a higher rate), CPAU’s CIP costs would rise. One project not included in this forecast is the seismic strengthening of a large water transmission line in the foothills. Staff has engaged a consultant to investigate alternatives for this project. The consultant is analyzing an alternative that involves installing a valve and hose system that could be used to bypass breaks in the line while they are repaired after an earthquake. This is a relatively low cost alternative that would not substantially affect the financial forecast. The study is not finalized yet, however, and if it is determined that the entire pipeline needs to be replaced, it could cost between $15 million and $20 million, which would likely require bond financing and would substantially affect the financial forecast. The final report with recommendations is expected to be available in 2016. Ongoing Projects and Customer Connections are projected to cost approximately $1.9 million in FY 2016 and increase by 3.5% per year through the end of the forecast period. Actual expenses for these projects fluctuate annually depending on how many defective meters are discovered and replaced during routine maintenance, as well as how much development and redevelopment is going on that prompts the replacement or upgrade of water services. It is worth noting that property owners pay a fee for water service replacement or expansion during redevelopment, so when the number of projects go up (meaning higher costs for this activity), so does fee revenue. Aside from customer connections, the CIP plan for FY 2016 to FY 2020 is funded by utility rates and capacity fees. The details of the plan are shown in Appendix B: Water Utility Capital Improvement Program (CIP) Detail. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 27 | P a g e SECTION 6D: DEBT SERVICE The Water Utility’s annual debt service is roughly $3.2 million per year. This is related to two bond issuances, one requiring payments through 2026, the other through 2035. CPAU is in compliance with all covenants on both bonds. The first bond is the 2009 Water Revenue Bond, Series A, issued for $35 million to finance construction of the Emergency Water Supply and Storage project (the El Camino Reservoir, new wells, rehabilitation of existing wells and tanks, etc.) and to be retired by 2035. As part of the ‘Build America’ bond program, there is an interest payment subsidy from the Federal Government of 35%. There is always the possibility that the federal government will choose to stop payment on this subsidy. The automatic federal spending cuts under the Budget Control Act (BCA) of 2011 have already reduced the subsidy by $50,000 per year, and if planned cuts through 2021 proceed without amendment, staff estimates that the subsidy would be reduced by over $200,000 per year by 2021. The Bipartisan Budget Act of 2013, which relieved some of the discretionary spending cuts in the 2011 BCA, did not affect automatic cuts to the subsidy, and actually extended the automatic cuts through 2023. The second bond issuance is the 2011 Utility Revenue Refunding Bond, Series A, which is to be retired in 2026. This $17.2 million issuance refinanced an earlier Water and Gas Utility bond issuance, the 2002 Utility Revenue Bonds, Series A, which was issued to finance various capital improvements for both systems. The Water Utility’s share of the issuance was roughly $7.8 million. The cost of debt service for the Water Utility’s share of these bond issuances for the financial forecast period is shown in Table 16: Table 16: Water Utility Debt Service ($000) FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 2009 Water Revenue Bonds, Series A(net of grants)2,002 2,012 2,031 2,046 2,064 2,079 2,101 2,151 2011 Utility Revenue Bonds, Series A 657 657 656 654 656 657 657 657 Both the 2009 and 2011 Bonds include the following covenants: 1) net revenues plus Available Reserves shall at least equal 125% of the maximum annual debt service, and 2) Available Reserves shall be at least 5 times the maximum annual debt service. Note that “Available Reserves,” as defined for both bonds, include the reserves for the Gas and Electric systems, not just the Water system. This Financial Plan maintains compliance with these covenants throughout the forecast period, as shown in Appendix A: Water Utility Financial Forecast Detail . The net revenues (but not the reserves) of the Water Utility are also pledged for one other bond as shown in Table 17 below, even though the Water Utility is not responsible for the debt service payments. The Water Utility’s reserves or net revenues would only be called upon if the responsible utilities are unable to make their debt service payments. Staff does not currently foresee this occurring. Requirements of the California Constitution require that any amounts advanced from one utility to pay debt service for another utility must be repaid by the borrowing fund. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 28 | P a g e Table 17: Other Issuances Secured by the Water Utility’s Revenues or Reserves Bond Issuance Responsible Utilities Annual Debt Service ($000) Secured by Water Utility’s: Net Revenues Reserves 1995 Series A Utility Revenue Bonds Storm Drain $680 Yes No SECTION 6E: OTHER REVENUES The Water Utility receives most of its revenues from sales of water, but about 7% comes from other sources. The largest revenue source in FY 2015 was a one­time return of previously budgeted CIP dollars (36%). The next largest source is connection and capacity fees, which in FY 2015 represented 29% of revenue from sources other than water sales. The remainder consisted of a variety of miscellaneous charges and transfers. Revenues from connection and capacity fees have more than doubled since FY 2009. Connection fees are charged to new developments that need new or replacement service connections, while capacity fees are charged to development that put additional demands on the water distribution system. Revenue from these sources decreased slightly during the recession, but has increased substantially since then. Staff is forecasting lower revenue from these sources in subsequent years, but has increased connection fees that are expected to offset these reductions to some extent. Other revenue sources are projected to stay stable through the forecast period, though interest income always fluctuates depending on changes in interest rates. Some uncertainty also exists related to the Federal government’s commitment to continuing to pay the interest subsidy on the Build America Bonds. SECTION 6F: SALES REVENUES Sales revenue projections are based on the load forecast in Section 5A: Load Forecast and the projected rate changes shown in Figure 5. Except where stated otherwise, these load forecasts are based on normal precipitation. Precipitation can vary substantially, however, even in non­ drought years, and this can affect revenues substantially. In dry years customers use more water, increasing revenues, and in wet years they use less. These variations happen in the winter, since summers have virtually no local precipitation regardless of whether it is a dry or wet year. The variationsare most likely related to winter irrigationdemand. SECTION 7: COMMUNICATIONS PLAN In FY 2017, communications will continue to focus on water utility rate increases, including the reasons why and how rates may change contingent upon continued drought conditions. The City will also communicate how infrastructure costs and rising rates from our wholesale water supplier, the San Francisco Public Utilities Commission, increases CPAU costs and must be recovered through rate increases. Rates communications will include a substantial update to information on a webpage dedicated to Utilities rates, “breaking news” on the Utility home webpage, discussion in the Proposition 218 rate adjustment notice, bill inserts, print ads, videos (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 29 | P a g e for web and television, social media posts and frequent educational updates to internal and external stakeholders (customer service, marketing, City Manager’s Office, UAC, City Council, business and residential customers). Other communications vehicles will include financial plans, presentations to UAC, Finance Committee, City Council and any media coverage as a result of the rate increases. CPAU will continue its outreach about drought conditions and importance of water use efficiency, tying in the message that although rates are increasing, efficient usage should mean that a customer should not see a significant increase in water utility costs on their bills. Water conservation outreach will include bill inserts, web updates, email blasts, videos for the web and television, presentations to customer groups and the use of social media. To keep customers apprised of the status and accomplishments of CIP projects, a network of project web pages are maintained. Traffic is driven to the website via ads in publications, newspaper inserts, and through the comprehensive portfolio of outreach strategies as outlined above. Safety topics are also emphasized year­round. For all utility outreach, while print materials and website pages still feature prominently, CPAU is placing more emphasis on digital advertising content, direct mail, community safety/emergency preparation events and presentations. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN F e b r u a r y 2 0 1 6 30 | P a g e APPENDICES Appendix A: Water Utility Financial Forecast Detail Appendix B: Water Utility Capital Improvement Program (CIP) Detail Appendix C: Water Utility Reserves Management Practices Appendix D: Description of Water Utility Operational Activities Appendix E: Sample of Water Utility Outreach Communications (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( DocuSign Envelope ID: rtoast;n4- HICE-412C-8D6E-EC4ireorarz u APPENDIX A: WATER UTILITY FINANCIAL FORECAST DETAIL 1 2 3 FISCAL YEAR FY 2011 FY 2012 FY 2013 FY2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 20 20 FY 2021 FY 202 2 FY 2023 FI�I WATER SUPPLY 4 Purchases 5 Sales 6 7 I BILL A ND RA TE CHA NGES 8 Variable Charge (Supply) 9 Variable Charge (Distribution) 10 Change in System Av erage Rate 11 12 I I 5,416,220 5,538,305 5,532,947 5,507,153 4,671,433 4,127,085 4,172,372 4,353,850 4,556,414 4,486,307 4,448,095 4,410,865 4,372,643 4,328,601 4,285,924 4,231,873 4,992,473 5,062,873 5,097,392 5,047,148 4,433,016 3,858,825 3,859,444 4,027,311 4,214,683 4,149,834 4,114,488 4,080,051 4,044,695 4,003,956 3,964,480 3,914,482 (530,686) -12.1% 15% -7% 0% 38% -12% 12% 11% 17% 22% -16% 30% 8% 25°70 -16% 0% 22% 10% 11% 7% 5% 6% 2% 15% 9% 2% 1.4% 9% 2% 9% 6% 2% 2% 2% 2% 2% 2% 2% 2% 2% 3% 3% 3% 3% 3 0/0 30/0 I I 3% 6% 5% 'STARTING RESERVES 13 Reappro priations (Non-CIP) 14 Commitments (Non-CIP) 15 Restricted for Debt Service 16 Emergency Plant Replacement 17 Capital Rese rve 18 Rate Stabilizatio n Reserv e 19 Operations Re serve 20 Unassigned 21 T OTAL STARTING RESERVES 22 23 R EVEN UES 54,000 20,000 - - - - - - - - - - - - - - 40,000 765,000 714,000 2,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 3,348,000 3,348,000 3,225,000 3,225,000 3,331,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 - - - - - - - - - - - - - - 4,000,000 13,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 17,037,000 10,639,000 7,996,000 17,272,000 20,133,000 6,567,000 1,867,000 - - - - - - - - - - - - 11,663,836 9,807,734 11,017,309 7,655,292 7,759,702 9,208,904 10,185,947 10,710,850 10,890,498 10,976,735 10,969,473 21,479,000 15,772,000 12,935,000 21,499,000 24,811,000 25,893,836 28,593,734 23,936,309 20,574,292 20,678,702 22,127,904 23,104,947 23,629,850 23,809,498 23,895,735 23,888,473 24 Net Sales 25 Other Revenues and Transfers In 26,133,998 30,673,882 36,647,924 39,029,262 33,654,549 36,263,267 38,159,141 40,715,075 46,016,043 48,155,815 48,584,946 49,023,735 49,587,825 50,566,700 51,576,926 53,401,555 2 812 063 5 892 133 6 811 461 4 053 920 7 504 848 3 307 155 3 363 253 3 420 419 3 478 285 3 536 762 3,597,449 3,662,424 3 ,728,765 3 ,816,351 3,906,270 3,998,583 26 TOTAL REVENUES 28,946,061 36,566,015 43,459,385 43,083,182 41,159 ,397 39,570,422 41,522,394 44,135,494 49,494,328 51,692,577 52,182,395 52,686,158 53,316,590 54 ,383,051 55,483,196 57,400,138 27 28 'EXPENSES 26 .4% 29 Water Purchases 10,677,914 14,889,399 16,605,351 15,705,288 15,669,935 17,644,669 18,899,310 19,976,217 21,177,479 21,259,327 21,475,294 21,696,607 21,914,567 22,302,108 22,701,664 23,050,946 30 31 Administration 32 Allocated Charges 1,798,630 2,003,116 2,422,880 2,366,077 2,342,985 2,343,499 2,402,461 2,462,917 2,524,882 2,588,411 2,653,298 2,719,668 2,787,709 2,857,466 2,928,969 3,002,261 33 Rent 2,122,405 2,156, 887 1,911,963 2, 192, 454 2, 249,457 2 ,677 ,106 2 ,757,419 2,840,142 2,925,346 3,013,106 3 ,103,500 3 ,196 ,605 3,292 ,503 3,391,278 3 ,493,016 3 ,597 ,807 34 Debt Ser vice 3,341,781 3,385,986 3,219,165 3,220,208 3, 218,869 3,222 ,606 3,219,316 3,222,669 3,220,858 3,220,638 3,222 ,843 3 ,223,563 3,224 ,553 3,224,553 3 ,224,553 3,224,553 35 Tran sfers a nd Other Adjustmen ts 200,286 301.963 2, 241, 793 335.808 63.612 376,108 383 ,630 391.302 399.129 407,111 415.253 423,558 432,030 432,030 432,030 432,030 36 Subto tal, Administration 7,463,102 7,847,952 9,795,801 8,114,546 7,874,923 8,619,319 8,762,826 8,917,030 9,070,214 9,229,266 9,394,893 9,563,393 9,736,794 9,905,326 10,078,567 10,256,650 37 Resource Management 575,834 552,972 557,910 570,040 488,331 601,238 621,475 642,529 664,121 686,511 706,216 724,410 743,231 762,742 782,766 803,316 38 Operations and Mtc 4,885,428 4,900,606 4,944,064 4,986,274 5,283,426 5,345,288 5,529,766 5,721,935 5,919,070 6,123,705 6,301,710 6,464,531 6,633,106 6,808 ,061 6,987,630 7,171,936 39 Engineering (Operating) 247,488 301,278 338,659 381,502 358,128 447,404 463,096 479,457 496,243 513,680 528,735 542,422 556,602 571,328 586,444 601,959 40 Customer Service 1,476,175 1,544,608 1,584,759 1,677,926 1, 821,447 2,027,659 2,098,960 2,173,305 2,249,589 2,328,837 2,397,182 2,459,257 2,523,568 2,590,368 2,658,935 2,729,318 41 Allowance for Unspe nt Budget - - - 401, 476 (411,505) (424,995) (438,832) (453 ,167) (465,976) (477,939) (490 ,301) (503,100) (516 ,234) (529,711) 42 Subtotal, Operating Expenses 14,648,027 15,147,415 17,221,192 15,730,288 15,826,254 17,442,384 17,064,620 17,509,261 17,960,405 18,428,832 18,862,761 19,276,075 19,702,999 20,134,724 20,578,108 21,033,467 Operating Expe nse s 43 Capital Program Contribution 44 TOTAL EXPENSES 45 46 ENDING RESERVES 9,327,120 9,366,201 1,068,841 8,335,605 8,580,372 11,039,470 10,215,889 10,012,033 10,252,034 10,555,216 10,867,297 11,188,574 11,519,375 11,859,984 12,210,686 12,571,782 34,653,061 39,403,015 34,895,385 39,771,182 40,076,561 46,126,524 46,179,819 47,497,511 49,389,918 50,243,375 51,205,352 52,161,256 53,136,941 54,296,815 55,490,458 56,656,195 47 Reappropriatio ns (No n-CIP) 20,000 - - - - - - - - - - - - - - - 48 Co mmitments (No n-CIP) 765,000 714,000 2,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 347,000 49 Restricted for Debt Service 3,348,000 3,225,000 3,225,000 3,331,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 3,316,000 50 Emergency Plant Replacement 1,000,000 1,000,000 1,000,000 1,000,000 - - - - - - - - - - - - 51 Capital Reserve - - - - 4,000,000 13,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 9,256,000 52 Rate Stabilization Re serve 10,639,000 7,996,000 17,272,000 20,133,000 6,567,000 1,867,000 - - - - - - - - 53 O peratio ns Re serve - - - - 11,663,836 9,807,734 11,017,309 7,655,292 7,759,702 9,208,904 10,185,947 10,710,850 10,890,498 10,976,735 10,969,473 11,713,415 54 Unassigne d - - - - - - - - - - - - - - - - 55 TOTAL ENDING RESERVES 15,772,000 12,935,000 21, 499,000 24,811,000 25,893,836 28,593,734 23,936,309 20,574,292 20,678,702 22,127,904 23,104,947 23,629,850 23,809,498 23,895,735 23,888,473 24,632,415 56 57 OPERATIO NS RESERVE 58 Min (60 days of non -capital expenses) 59 Target (90 days of no n -capital ex penses) 60 Max (120 days of non -capital expenses) 61 Risk Assessment Value 5,230,611 6,082,017 6,232,446 6,488,975 6,767,143 6,864,270 6,977,906 7,089,168 7,202,255 7,336,928 7,475,494 7,607,764 9,395,240 9,166,903 9,395,593 9,783,548 10,204,079 10,353,171 10,527,111 10,697,594 10,870,947 11,085,459 11,306,122 11,517,661 13,559,870 12,251,790 12,558,739 13,078,120 13,641,014 13,842,072 14,076,317 14,306,020 14,539,639 14,833,990 15,136,750 15,427,559 2,481,768 2,873,181 2,840,361 3,050,960 3,320, 931 3,523,428 3,579,316 3,636,369 3,704,694 3,794,916 3,892,600 4,062,286 DocuSign Envelope ID: 7E693CB4-AFCE-4F2C-8D6E-EC47FB5F9F2D 1 2 3 Appe ndix A (continued) REVENUES 4 Net Sale s 5 Other Revenues and Transfers In 6 TOT AL REVENUES 7 8 90% 84% 84% 91% 10% 16% 16% 9% 100% 100% 100% 100% 82% 18 0/0 100% 92% 8% 100% 92% 8% 100% 92% 8% 100% 93% 7% 100% 93% 7% 100% 93% 7% 100% 93% 7% 100% 93% 7% 100% 93% 7% 100% 93% 7% 100% 930/0 7% 100% IXXPENSES 9 Wa te r Pu rchases 31% 38% 48% 39% 39% 38% 41% 42% 43% 42% 42% 42% 41% 41% 41% 41% 10 Operating Expenses 11 Administratio n 12 Allo cated C harges 5% 5% 7% 6% 6% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 13 Rent 6% 5% 5% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 14 Debt Service 10% 9% 9% 8% 8% 7% 7% 7% 7% 6% 6% 6% 6% 6% 6% 6% 15 Tra ns fe rs and Other Adjustments 1°�/ % ¢/u % Q°/s 1� % 1% 1% l M . VIQ M M > 16 Subtotal, Administratio n 22% 20% 28% 20% 20% 19% 19% 19°7 ° 18% 18% 18% 18% 18% 18% 18°/s 18% 17 Resource Management 2% 1% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 18 Operations and Mtc 14% 12% 14% 13% 13% 12% 12% 12% 12% 12% 12% 12% 12% 13% 13% 13% 19 Engineering (Operating) 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 20 Custome r Service 4% 4% 5% 4% 5% 4% 5% 5% 5% 5% 5% 5°/ s 5% 5% 5% 5°7a 21 Allo wance fo r Unspent Bu dge t 0% 0% 0% 0% 0% 1% -1% -1% -1% -1% -1% -1% -1% -1% -1% -1% 22 ,Subtotal, Operating Expenses 42% 38% 49% 40% 39% 38% 37% 37% 36% 37% 37% 37% 37% 37% 37% 37% 23 Capital Program Contribution 27° /s 24% 3% 21% 21% 24% 22% 21% 21% 21% 21% 21% 22% 22% 22% 22% 24 TOTAL EXPENSES 100% 100%. 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 25 26 RISK A SSESSMENT DET AIL 27 Distribu tion Reve nue Variance 28 10% UP Program Co ntinge ncy 29 Total Risk Assse ssment Value 30 Projected Operations Reserve 31 Operations Reserve , % of Risk Value 32 33 1,623,731 1,769,234 1,818,772 2,049,757 2,295,727 2,467,907 2,492,586 2,517,512 2,552,757 2,608,918 2,671,532 2,805,108 858,037 1,103,947 1,021,589 1,001,203 1,025,203 1,055,522 1,086,730 1,118,857 1,151,938 1,185,998 1,221,069 1,257,178 2,481,768 2,873,181 2,840,361 3,050,960 3,320,931 3,523,428 3,579,316 3,636,369 3,704,694 3,794,916 3,892,600 4,062,286 11,663,836 9,807,734 11,017,309 7,655,292 7,759,702 9,208,904 10,185,947 10,710,850 10,890,498 10,976,735 10,969,473 11,713,415 470% 341% 388% 251% 234% 261% 285% 295% 294% 289% 282% 288% I O PERA TION S R ESER VE 34 Min (60 days of non -capital e xpenses) 35 Target (90 days of non -capital expe nses) 36 Max (120 days of non -capital expenses) 37 Risk Assessment Value 38 39 5,230,611 6,082,017 6,232,446 6,488,975 6,767,143 6,864,270 6,977,906 7,089,168 7,202,255 7,336,928 7,475,494 7,607,764 9,395,240 9,166,903 9,395,593 9,783,548 10,204,079 10,353,171 10,527,111 10,697,594 10,870,947 11,085,459 11,306,122 11,517,661 13,559,870 12,251,790 12,558,739 13,078,120 13,641,014 13,842,072 14,076,317 14,306,020 14,539,639 14,833,990 15,136,750 15,427,559 2,481,768 2,873,181 2,840,361 3,050,960 3,320,931 3,523,428 3,579,316 3,636,369 3,704,694 3,794,916 3,892,600 4,062,286 I DEBT SERV ICE C OVERAG E RATIO I I I 40 Net Revenues (125% of Debt Service) 41 Available Reserves (5x Debt Service)* 658% 3. 5 787 2. 7 951% 5.7 8760/0 6.6 878% 6.9 989% 7.7 1017% 6.3 1063% 5 .2 1115% 5 .3 1132% 5.7 1152% 6 .0 1171% 6 .2 1191% 6 .2 1216% 6.3 1242% 6.3 1267% 6 .5 DocuSign Envelope ID: 7E693CB4-AFCE-4F2C-8D6E-EC47FB5F9F2D WATER UTILITY FINANCIAL PLAN APPENDIX B: WATER UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL Remaining in CIP Projtct I: Projttt.11ame e i r .; i.,. ia,l ONE TIME PROJECTS WS -07000 Regulation Station Imp . 323,320 - - - - - WS -07001 Water Recy cling Facilities 200,601 2,231 - - - - WS -08001 Water Reserv oir C oating 2,475,603 - - - - - WS -03000 Seismic Water System 4,850,231 - - - - - WS -11001 Vacuum Excavati on Equip . - - - - - - WS -13003 GPS Equipment Upgrade 200,000 - - - - - WS -13004 Asset Mgmt. M obile Sys . 31,522 - - - - WS -13006 Meter Shop Renovations 46,832 - - - - - WS -15004 Water System Master Plan 244,814 78,666 WS -08002 Emergency Water Supply 703,817 448,733 - - - - Su btotal, Ore -time Projec ts 3,743,460 523 .636 - - - - - WATER MAIN REPLACEMENT PROGRAM WS-xxxx WAR - Project 32 - - - - - - 658,543 WS -03001 \Y MR - Project 23 - - - - - - WS -10001 WMR-Pro ject 24 - - - - - - 'V S -11000 WMR-Pro ject 25 1,181,868 133,000 - - - - WS -12001 WMR- Project 26 5,324,570 - - - - - WS -13001 WMR - Project 27 566,065 42,500 5,68 0,651 - - - - WS -14001 WMR - Project 28 - - 585,107 5,851,070 - - - WS -15002 WMR - Project 28 - - - 602,660 6,026,602 - - WS -16001 WIVIR - Project 30 - - - - 620,740 6,207,400 WS -13001 WMR - Project 31 - - - - - 633,362 6,336,000 Subtotal, Wate r Main Re place men t Prog- 7,674,503 235.500 6,265,758 6 ,453,730 6,647,342 6,846 ,762 7,054,543 June 16, 2014 33 DocuSign Envelope ID: 7E693CB4-AFCE-4F2C-8D6E-EC47FB5F9F2D WATER UTILITY FINANCIAL PLAN Appendix B: Water Utility Capital Improvement Program (CIP) Detail (Continued) Pre-ecit S rot Name AIL F ''Mat ' FT'20A.1, ONGO ING PROJECTS WS -80014 ServiceaHydrants 134,863 - 400,000 412,000 424,360 437,031 450,204 WS -80015 Water Motors 402,888 110,305 565,000 565,000 500,000 515,000 530,450 WS -02014 W -G -W Utility GIS data 285,257 183,063 366,025 402,628 442,830 456,177 463,862 WX-xxxx Annual Survey 40,000 41,200 42,436 43,703 45,020 WS -13002 EquipmentfT ools 50,000 - 50,000 50,000 50,000 50,000 50,000 WS -11003 Dist. Sys. Impr ovements 155,803 :3,000 733,000 247,000 254,000 261,620 263,463 WS -11004 Supply Sys . Improvements 106,524 35,614 233,000 247,000 254,000 261,620 263,463 Subto tal, Ongo ing Pro jects 1,135,335 332,588 2,333,025 1,364,828 1,367,686 2,025,217 2,084,473 CU STO MER CO NN ECT IONS [FEE FUNDED] WS -80013 Water System Extensions 50,436 42,880 630,000 710,700 732,021 753,332 776,601 Su btota l, Cus tome r Co tions 50.436 42,880 630.000 710.100 132.021 153.382 776,601 GRAND TOT AL 18,663 ,734 1 .140.664 3 ,354.783 3 .123 .258 3,347,043 3.625.361 3 ,315,617 For din g Sou rc es Connection?Capacity Fees 630,000 710,700 732,021 753,382 Other Utility Funds (Asset Mgmt, GIS Systems) 244,017 268,418 235,260 304,118 Utility Rates 3,354,783 3,123,258 3,347,043 3,625,361 3,315,617 CIP-RELAT ED RESERVES DETAIL 313012015 Reappro priations (excl. Bond Funded) 17,523,130 Co mmitments (excl. Bond Funded) 1,140,664 June 16, 2014 34 WATER UTILITY FINANCIAL PLAN J u n e 1 6 , 2 0 1 4 35 | P a g e APPENDIX C: WATER UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices shall be used when developing the Water Utility Financial Plan: Section 1. Definitions a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal years covered by the Financial Plan. For example, for the Water Utility Financial Plan delivered in conjunction with the FY 2015 budget, FY 2015 to FY 2021 is the Financial Planning Period. b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers to the Utility’s Unrestricted Net Assets. c) “Net Assets” ­ The Government Accounting Standards Board defines a Utility’s Net Assets as the difference between its assets and liabilities. d) “Unrestricted Net Assets” ­ The portion of the Utility’s Net Assets not invested in capital assets (net of related debt) or restricted for debt service or other restricted purposes. Section 2. Reserves The Water Utility’s Fund Balance is reserved for the following purposes: a) For existing contracts, as described in Section 3 (Reserve for Commitments) b) For operating and capital budgets re­appropriated from previous years, as described in Section 4 (Reserve for Re­appropriations) c) For cash flow management and contingencies related to the Water Utility’s Capital Improvement Program (CIP), as described in Section 5 (CIP Reserve) d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve) e) For operating contingencies, as described in Section 7 (Operations Reserve) f) Any funds not included in the other reserves will be considered Unassigned Reserves and shall be returned to ratepayers or assigned a specific purpose as described in Section 8 (Unassigned Reserves). Section 3. Reserve for Commitments At the end of each fiscal year the Reserve for Commitments will be set to an amount equal to the total remaining spending authority for all contracts in force for the Water Utility at that time. Section 4. Reserve for Re­appropriations At the end of each fiscal year the Reserve for Re­appropriations will be set to an amount equal to the amount of all remaining capital and non­capital budgets, if any, that will be re­ appropriated to the following fiscal year in accordance with Palo Alto Municipal Code Section 2.28.090. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN J u n e 1 6 , 2 0 1 4 36 | P a g e Section 5. CIP Reserve The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for capital contingencies. Staff will manage the CIP Reserve according to the following practices: a) The following guideline levels are set forth for the CIP Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning Period based on the levels of CIP expense budgeted for that year. Minimum Level 12 months of budgeted CIP expense Maximum Level 24 months of budgeted CIP expense b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and the Reserve for Commitments when funds are added or removed from to that reserve as a result of a change in contractual commitments related to CIP projects. Any other additions to or withdrawals from the CIP reserve require Council action. c) Minimum Level: i) Funds held in the Reserve for Commitments may be counted as part of the CIP Reserve for the purpose of determining compliance with the CIP Reserve minimum guideline level. ii) If, at the end of any fiscal year, the minimum guideline is not met, staff shall present a plan to the City Council to replenish the reserve. The plan shall be delivered by the end of the following fiscal year, and shall, at a minimum, result in the reserve reaching its minimum level by the end of the next fiscal year. For example, if the CIP Reserve is below its minimum level at the end of FY 2017, staff must present a plan by June 30, 2018 to return the reserve to its minimum level by June 30, 2019. In addition, staff may present, and the Council may adopt, an alternative plan that takes longer than one year to replenish the reserve, or that does so in a shorter period of time. d) Maximum Level: If, at any time, the CIP Reserve reaches its maximum level, no funds may be added to this reserve. If there are funds in this reserve in excess of the maximum level staff must propose to transfer these funds to another reserve or return them to ratepayers in the next Financial Plan. Staff may also seek City Council to approve holding funds in this reserve in excess of the maximum level if they are held for a specific future purpose related to the CIP. Section 6. Rate Stabilization Reserve Funds may be added to the Rate Stabilization Reserve by action of the City Council and held to manage the trajectory of future year rate increases. Withdrawal of funds from the Rate Stabilization Reserve requires Council action. If there are funds in the Rate Stabilization Reserve at the end of any fiscal year, any subsequent Water Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the next Financial Planning Period. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN J u n e 1 6 , 2 0 1 4 37 | P a g e Section 7. Operations Reserve The Operations Reserve is used to manage normal variations in costs and as a reserve for contingencies. Any portion of the Water Utility’s Fund Balance not included in the reserves described in Section 3­Section 6 above will be included in the Operations Reserve unless this reserve has reached its maximum level as set forth in Section 7(d) below. Staff will manage the Operations Reserve according to the following practices: a) The following guideline levels are set forth for the Operations Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning Period based on the levels of Operations and Maintenance (O&M) and commodity expense forecasted for that year in the Financial Plan. Minimum Level 60 days of O&M and commodity expense Target Level 90 days of O&M and commodity expense Maximum Level 120 days of O&M and commodity expense b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations Reserve are lower than the minimum level set forth above, staff shall present a plan to the City Council to replenish the reserve. The plan shall be delivered within six months of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its minimum level by the end of the following fiscal year. For example, if the Operations Reserve is below its minimum level at the end of FY 2014, staff must present a plan by December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In addition, staff may present, and the Council may adopt, an alternative plan that takes longer than one year to replenish the reserve. c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower than the target level, any Financial Plan created for the Water Utility shall be designed to return the Operations Reserve to its target level within four years. d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no funds may be added to this reserve. Any further increase in the Water Utility’s Fund Balance shall be automatically included in the Unassigned Reserve described in Section 8, below. Section 8. Unassigned Reserve If the Operations Reserve reaches its maximum level, any further additions to the Water Utility’s Fund Balance will be held in the Unassigned Reserve. If there are any funds in the Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the City Council must include a plan to assign them to a specific purpose or return them to the Water Utility ratepayers by the end of the first fiscal year of the next Financial Planning Period. For example, if there were funds in the Unassigned Reserves at the end of FY 2015, and the next Financial Planning Period is FY 2016 through FY 2021, the Financial Plan shall include a plan to return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff may present an alternative plan that retains these funds or returns them over a longer period of time. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( WATER UTILITY FINANCIAL PLAN J u n e 1 6 , 2 0 1 4 38 | P a g e APPENDIX D: DESCRIPTION OF WATER UTILITY OPERATIONAL ACTIVITIES This appendix describes the activities associated with the various operational activities referred to in Section 6B: Operations of this Financial Plan. Administration: Accounting, purchasing, legal, and other administrative functions provided by the City’s General Fund staff, as well as shared communications services, CPAU administrative overhead, and billing system maintenance costs. This category also includes Water Utility debt service and rent paid to the General Fund for the land associated with reservoirs and various other facilities. Customer Service: This category includes the Water Utility’s share of the call center, meter reading, collections, and billing support functions. Billing support encompasses staff time associated with bill investigations and quality control on certain aspects of the billing process. It does not include maintenance of the billing system itself, which is included in Administration. This category also includes CPAU’s key account representatives, who work with large commercial customers who have more complex requirements for their water services. Engineering (Operating):The Water Utility’s engineers focus primarily on the CIP, but a small portion of their time is spent assisting with distribution system maintenance. Operations and Maintenance: This category includes the costs of a variety of distribution system maintenance activities, including: investigating reports of damaged mains or services and performing emergency repairs; testing and operating valves; monitoring water quality and reservoir levels; monitoring the status of the different pressure zones; flushing water at hydrants and other closed end points of the system; building and replacing water services for new or redeveloped buildings; and testing and replacing meters to ensure accurate sales metering. This category also includes a variety of functions the utility shares with other City utilities, including: the Field Services team (which does field research of various customer service issues); the Cathodic Protection team (which monitors and maintains the systems that prevent corrosion in metal tanks and reservoirs); and the General Services team (which manages and maintains equipment, paves and restores streets after gas, water, or sewer main replacements, and provides welding services) Resource Management:This category includes water procurement, contract management, water resource planning, interaction with BAWSCA, the SFPUC, and the SCVWD, and tracking of legislation and regulation related to the water industry. (SGY7MKR)RZIPSTI-()'&%*')*'())'*&**( J u n e 1 6 , 2 0 1 4 39 | P a g e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