t CITY OF SONOMA Water Enterprise Financial Plan

t CITY OF SONOMA Water Enterprise Financial Plan

t CITY OF SONOMA Water Enterprise Financial Plan Overview City Council Meeting - March 19, 2018 1 Steps in Conducting a Rate Study Cost of Service & Rate Design Financial Plan Evaluation of CIP and financing options Cash flow analysis for financial sufficiency Rate Setting Framework Financial goals and policies Pricing objectives Cost allocations Rate design "Rate calculations "Customer impact analyses Final Rate Adoption Report Prop 218 Notice Public Hearing AGENDA Preliminary Financial Plan Model Overview Proposed and projected O&M Transfers as currently defined cost allocation plan

and transfer analysis in process Inflation/escalation assumptions Projected growth in accounts & usage Capital Improvement Plan (CIP) Projected revenues Reserve policies Financial plan scenarios Dashboard Review Status quo & proposed scenarios 3 Financial Plan Model Overview 4 ESCALATION FACTORS FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Budgetary Inflation Factors General Salary Benefits Utilities Construction Insurance Engineering Professional Services Water Purchase Cost No Inflation 3.0%

3.0% 8.0% 3.0% 3.0% 3.0% 3.0% 3.0% 6.0% 0.0% 3.0% 3.0% 8.0% 3.0% 3.0% 3.0% 3.0% 3.0% 6.0% 0.0% 3.0% 3.0% 8.0% 3.0% 3.0% 3.0% 3.0% 3.0% 6.0% 0.0% 3.0% 3.0% 8.0% 3.0% 3.0% 3.0% 3.0% 3.0%

6.0% 0.0% 3.0% 3.0% 8.0% 3.0% 3.0% 3.0% 3.0% 3.0% 6.0% 0.0% Non-Operating Revenue Growth 0.0% 0.0% 0.0% 0.0% 0.0% Historic CPI averages have been roughly 3%. Historic CCI (construction cost index) has been on average slightly above 3% for Northern California since 1978. Anticipated SCWA cost increases are roughly ~6%/year. 5 PRELIMINARY O&M Cost allocation plan in process, O&M subject to change FY 2018 FY 2019 FY 2020

FY 2021 FY 2022 FY 2023 Budget Projected Projected Projected Projected Projected SALARY & WAGES $864,704 $890,645 $917,364 $944,885 $973,232 $1,002,429 EMPLOYEE BENEFITS $347,759 $375,580 $405,626 $438,076

$473,122 $510,972 PROFESSIONAL SERVICES $366,740 $377,742 $389,074 $400,747 $412,769 $425,152 PROPERTY/ WATER SERVICES $1,700,664 $1,602,616 $1,703,009 $1,811,055 $1,926,093 $2,048,585 OPERATIONS $116,700 $155,201 $159,857 $164,653 $169,592 $174,680 SUPPLIES $194,250

$200,078 $206,080 $212,262 $218,630 $225,189 $4,752 $4,895 $5,041 $5,193 $5,348 $5,509 INTERNAL SERVICES & CAPITAL $158,874 $163,640 $168,549 $173,606 $178,814 $184,179 TRANSFERS $398,640

$407,663 $416,525 $425,479 $318,644 $328,203 CAPITAL ASSETS TOTAL EXPENSE $4,155,083 $4,178,059 $4,371,127 $4,575,955 $4,676,245 $4,904,898 6 ACCOUNT & USAGE GROWTH FY 2018 Account Growth FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 0.4% 0.4% 0.4% 0.5%

0.5% 0.5% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 4,384 4,402 4,420 4,440 4,460 4,481 Outside City Accounts 326 327 328 329 330

331 Inside City Fire Lines 140 140 140 140 140 140 12 12 12 12 12 12 1,731 AF 1,738 AF 1,745 AF 1,753 AF 1,762 AF 1,770 AF

Demand Factor Inside City Accounts Outside City Fire Lines Sold Water 7 CURRENT DEBT 2012 Revenue Bonds Principal Interest (3.9%) Total FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 $75,000 $75,000 $75,000 $80,000 $85,000 $85,000 $48,653 $45,728 $42,803 $39,780 $36,563 $33,248 $123,653 $120,728 $117,803 $119,780 $121,563 $118,248 2012 Revenue Bonds were a refinance of the 2001 Bond Issuance. The 2001 Bond Issuance financed the following improvements: Water Tank Project Construction of a 3.0 million gallon water storage tank, 1800 lineal feet of 12inch diameter water transmission pipe, a pump station and pressure zone intertie facilities. Installation of Water Mains and Laterals The construction consisted of 8" and 10" diameter water mains and appurtenances: water service laterals; necessary trenching, road and concrete

repair; and other associated work. 8 CIP: Scenario 1 ASR Well 6 Groundwater Banking Project W Napa St. Water System Rep Project Water Services with Street Rehabilitation Condition Data Phase 1 & 2 Renewal and Replacement of Existing Pipelines Condition Assessment of AC Pipes Fire Flow Improvements - Upsizing AC Pipe 8" PVC Fire Flow Improvements - Upsizing Unknown Pipe 8" PVC New Well No. 9 2020 UWMP and Minor Water Master Plan Update Meter System Upgrades Total FY 2018 $35,000 $2,800,000 $210,800 $0 $0 $0 $0 $0 $0 $0 $0 $3,045,800 FY 2019 FY 2020 FY 2021 FY 2022

FY 2023 $0 $0 $217,124 $136,990 $0 $23,690 $597,400 $0 $465,620 $0 $25,750 $1,466,574 $0 $0 $223,638 $106,811 $0 $0 $615,322 $509,232 $307,131 $0 $79,568 $1,841,701 $0 $0 $230,347 $49,173 $1,201,344 $0 $0 $0 $820,060 $81,955 $878,461 $3,261,339

$0 $0 $237,257 $50,648 $1,237,384 $0 $0 $0 $844,662 $0 $904,815 $3,274,766 $0 $0 $244,375 $52,167 $1,274,506 $0 $0 $0 $0 $0 $931,959 $2,503,007 9 CIP: Scenario 2 ASR Well 6 Groundwater Banking Project W Napa St. Water System Rep Project Water Services with Street Rehabilitation Condition Data Phase 1 & 2 Renewal and Replacement of Existing Pipelines Condition Assessment of AC Pipes Fire Flow Improvements - Upsizing AC Pipe 8" PVC Fire Flow Improvements - Upsizing Unknown Pipe 8" PVC New Well No. 9 2020 UWMP and Minor Water Master Plan Update

Meter System Upgrades Total FY 2018 $35,000 $2,800,000 $210,800 $0 $0 $0 $0 $0 $0 $0 $0 $3,045,800 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 $0 $0 $217,124 $136,990 $0 $23,690 $597,400 $0 $465,620 $0 $25,750 $1,466,574

$0 $0 $223,638 $106,811 $0 $0 $615,322 $509,232 $307,131 $0 $79,568 $1,841,701 $0 $0 $230,347 $49,173 $1,201,344 $0 $0 $0 $820,060 $81,955 $0 $2,382,878 $0 $0 $237,257 $50,648 $1,237,384 $0 $0 $0 $844,662 $0 $0 $2,369,951 $0

$0 $244,375 $52,167 $1,274,506 $0 $0 $0 $0 $0 $0 $1,571,048 10 REVENUES FY 2018 Total Revenue From Rates FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 $4,499,567 $4,652,586 $4,671,118 $4,692,223 $4,713,395 $4,734,887 Total Non-Operating Revenue1 $55,600 $55,781 $55,963 $56,172

$56,382 $56,593 Interest $28,146 $15,276 $12,301 $16,818 $27,710 $32,480 TOTAL REVENUE 1 $4,583,313 $4,723,643 $4,739,381 $4,765,213 $4,797,487 $4,823,960 New service fees, late fees, and miscellaneous water revenues 11 Reserve Policies 12 Importance of Financial Policies To maintain financial solvency Provide a basis for coping with fiscal emergencies (revenue short-falls, asset failure, emergencies, etc.) To provide guidelines for sound financial management with an overall long-range

perspective 13 Why Do We Need Reserves? Nature of municipal utility system Capital intensive Highly fluctuating capital costs Risk and liability unknown liability costs Emergencies or capital infrastructure problems that may arise Healthy reserves levels better credit ratings lower interest rates for future debt 14 Financial Health Indicators 1. Reserve Balances: 1) Operating Reserve: to meet daily working capital for operating expenses 2) Capital Replacement Reserve: for future capital expenditures 3) Rate Stabilization Reserve: to be used during periods of short-term revenue shortages (recession, drought) to prevent rate-shock and phase in any necessary rate adjustments 4) Emergency Reserve: funds available in case of asset failure or natural disaster 2. Debt Coverage Ratios To meet Official Statement requirements To achieve credit ratings from rating agencies 15 Financial Policy Framework

Debt Coverage Based on Rate Covenant, Debt Coverage 1.25x S&P Criteria < 1.0x Insufficient 1.0x to 1.25x Adequate 1.26x to 1.50x Good > 1.50x Strong Currently calculating a roughly >3.4 x Debt Coverage 16 Sample Financial Policy Framework Target Levels Example Range for Sonoma FY 2017-18 Bases Operating Reserve 60 - 90 days (1525% of O&M) $620,000 to $1.04 million Monthly billing Capital Reserve 1 Year of Average CIP Expenditure

$2.58 million Industry Norm $325,000 to $630,000 Revenue sensitivity analysis Dependent on critical assets Critical Asset Study Reserves Rate Stabilization 10 - 20% of Fund Volumetric Revenue Emergency Critical Asset Repair 17 FINANCIAL HEALTH INDICATORS Healthy Reserves Operating Reserve results from positive cash flow CIP Reserves Can award contracts quickly and speed up projects if necessary Debt Coverage Ratio Exceed Official Statement requirements Achieve / Maintain good credit ratings 18 EXAMPLE OF RESERVE POLICIES Agency

O&M Capital Emergency Rate Stabilization City of Windsor 25% of O&M Costs $1.25 Million VOMWD 25% of O&M Costs $1.1 Million $500,000 (one month of rate revenues) City of Petaluma 25% of O&M Costs $4 Million (average annual CIP spending) City of

Rohnert Park 50% of O&M Costs City of Santa Rosa 15% of O&M Costs $1.5 Million $5.75 Million (amount necessary to restore (basic services) 19 Financial Plan Scenarios 20 MODEL DASHBOARD OVERVIEW (FOR ILLUSTRATIVE PURPOSES ONLY) FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Sonoma Financial Plan Model 2018 Dashboard

Control Panel Revenue Adjustment Adjustment Month Demand Factor Debt Issuance Years Displayed Jul 100.0% 8.0% Aug 100.0% $1,500,000 8.0% Jul 100.0% 8.0% Jul 100.0% $2,600,000 8.0% Jul 100.0% 8.0% Jul 100.0% 6 Financial Policies Debt Coverage Operating Reserve Capital Reserve Rate Stabilization Reserve Level

Include AMI Spending? 125.0% 15.0% of O&M Expenses 100.0% of average CIP over the next 5 years 10.0% of commodity revenue Operating FALSE 21 DASHBOARD: KEY VARIABLES (FOR ILLUSTRATIVE PURPOSES ONLY) FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Sonoma Financial Plan Model 2018 Dashboard Control Panel Revenue Adjustment Adjustment Month Demand Factor Debt Issuance Years Displayed Jul 100.0% 8.0% 8.0%

8.0% 8.0% 8.0% Aug 100.0% $1,500,000 Jul 100.0% Jul 100.0% $2,600,000 Jul 100.0% Jul 100.0% 6 Financial Policies Debt Coverage Operating Reserve Capital Reserve Rate Stabilization Reserve Level Include AMI Spending? 125.0% 15.0% of O&M Expenses 100.0% of average CIP over the next 5 years 10.0% of commodity revenue Operating FALSE

Required/Target Debt Coverage Reserve Policies CIP Scenario Selector Key Variables: Revenue Adjustments Water Demand Factor New Debt Issues 22 DASHBOARD: GRAPHICAL RESULTS (FOR ILLUSTRATIVE PURPOSES ONLY) Blue Bars show revenue adjustments Orange Line shows debt coverage Grey Line shows required coverage Blue Line shows revenue at proposed levels Red Line shows revenue at current rates Stacked bars show revenue requirements 23 DASHBOARD: GRAPHICAL RESULTS (FOR ILLUSTRATIVE PURPOSES ONLY) Blue Bars show ending balances Lines show reserve targets Grey Bars show PAYGO CIP Orange Bars show Debt Funded CIP

24 STATUS QUO FINANCIAL PLAN No revenue adjustments No new debt issue CIP scenario without AMI upgrades 25 CONCEPTUAL FINANCIAL PLAN 1 (AMI Upgrades Included) 10% annual revenue adjustments through FY 2023 $1.6M debt issuance in FY 2019, $7.1M debt issuance in FY 2021 CIP scenario with AMI upgrades Fully Funds Rate Stabilization, Operating, and Capital Reserves by FY 2023 26 CONCEPTUAL FINANCIAL PLAN 2 (AMI Upgrades Excluded) 9% revenue adjustments through FY 2023 $1.5M debt issuance in FY 2019, $4M debt issuance in FY 2021 CIP scenario without AMI upgrades Fully Funds Rate Stabilization, Operating, and Capital Reserves by FY 2023

27 Raftelis is a Registered Municipal Advisor within the meaning as defined in Section 15B (e) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder (Municipal Advisor Rule). However, except in circumstances where Raftelis expressly agrees otherwise in writing, Raftelis is not acting as a Municipal Advisor, and the opinions or views contained herein are not intended to be, and do not constitute advice within the meaning of the Municipal Advisor Rule. 28 Contact: Sally Van Etten 510 813 8704 / [email protected] 29

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