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March 1, 2007

Review of the Financial Parameters Affecting Policy Decision Making Water and Sewer Enterprise System. March 1, 2007. Informational needs in order to make policy leadership decisions. 1. Financial parameters and limitations 2. Utility system – capabilities, strengths and weaknesses

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March 1, 2007

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  1. Review ofthe Financial Parameters Affecting Policy Decision Making Water and Sewer Enterprise System March 1, 2007

  2. Informational needs in order to make policy leadership decisions 1. Financial parameters and limitations 2. Utility system – capabilities, strengths and weaknesses 3. Capital plan 4. Financial feasibility

  3. Business Plan 1. Allocates resources, plans for contingencies 2. Contains data and information - to make good business decisions 3. Financial and capital decisions 4. Requirement to raise capital 5. Informs - planners, investors, banks, community 6. Rating agencies

  4. Policy leadership decisions • What financial resources are available to invest in the utility system? • What types of investments should be made? • What options are available to make water and wastewater resources more available and who pays?

  5. Factors influencing policy decisions • Lenders contractual requirements • Financial structure and performance • Credit quality standards - cost of borrowing • Washington and Raleigh laws and regulations and BOCC policies

  6. Contractual Requirements

  7. Revenue Bonds • borrowed money for capital improvements • mortgage secured by the utility system revenues - promises • contractual agreement - general trust indenture • enforce and monitor County’s compliance - lenders appointed a trustee

  8. Revenue Bonds - Trustee Accounts Revenue Acct. $1.00 O&M Acct. $0.47 Debt Acct. 1st – Revenue 2nd - Subordinate $0.30 Extension & Repair Acct. $0.03 Surplus - CIP $0.20

  9. Revenue Bonds - Rate Covenant Revenues 20% Working Capital Operations & Maintenance P&I + 20% + >= + A B C Sales 1.00 1.00 1.00 Capacity Fees 0.30 0.30 - Working Capital (20%) 0.16 0.02 0.16 1.46 1.32 1.16 O&M 0.60 0.60 0.60 Debt Service 0.70 0.70 0.70 +20% 0.14 0.14 0.14 1.44 1.44 1.44

  10. Revenue Bonds - Additional Bonds Test • lenders’ permission • historical earnings test – existing debt + new debt • future earnings test – consulting engineer report for the first two fiscal years • liens or encumbrances – NTE 20% of assets

  11. Revenue Bonds - Sale of the System • political subdivision or public agency • portions of the system - no longer necessary, useful or profitable • Extension and Replacement Fund

  12. Revenue Bonds - Monitoring and Financial Budget Report Audit Report Engineering Reports • file with lenders and the LGC an annual audit report • demonstrate compliance with rate covenant • SEC continuing disclosure • file with the lenders an annual budget • inspection of the system by consulting engineers and the filing of the report with the lenders and the LGC • risk management – liability, property loss and damage, business interruption

  13. Credit Quality Standards

  14. Credit Quality Standards • lenders ===> evaluate risk • no rating = no access to capital • credit ratings impact borrowing costs • higher ratings = lower borrowing costs • each category in “investment grade” = $16K/$1MM • Current CIP - $1.4MM • A2, A and A+ AAA - Highest Quality AA - High Quality A - Strong Capacity BBB - Adequate Capacity BB - Low Speculative B - Speculative CCC & CC - High Speculation D - Default

  15. Credit Quality Standards • indicators - fiscal, debt, economic, management, system • no single, absolute indicator • working capital (BOCC 365 days, 385 – 438 days NC) • senior debt service coverage (credit compliance standard - 2.1X to 2.5X) • all debt service coverage (BOCC 1.0X minimum – credit compliance standard closer to 1.5X) • contribution of equity to capital program (minimum 35%) • rates – (1.5% MHI) • cost of service based rates and self-sufficiency • master plans, CIPs and financial feasibility

  16. Laws, Regulations and Policies

  17. Laws and Regulations NC General Statutes - Rates and Charges - Capacity Fees • G.S. 153A-276/277/284 • “establish and revise from time to time schedules of rents, rates, fees, charges, and penalties for the use of or the services furnished by a public enterprise” • “rents, rates, fees, charges, and penalties may vary for the same class of service in different areas of the county” • “may vary according to classes of service” • recoup capital costs for facilities in use/not in use (I.e. growth) • cannot be arbitrary nor w/o basis (i.e. result from planned improvements) • capacity component costs – water and wastewater treatment plant, transmission and outfall facilities, pump and lift stations • restricted to the use of capital costs for which capacity fees are imposed

  18. Water and Sewer Line Extension • Construction Policy • Rates, Fees and Charges • Easement Acquisition • Self-help • Automated Meter Reading • Risk Management • Sewer Cap • I&I Reduction and Rehabilitation • Billing and Collections • Cashiering and Petty Cash Policy • Water Conservation • Bank Drafts • Utility Line Locates & NC 1 Call • Fire Hydrant Usage • Harris Customer Information System BOCC Policies PW Rules and Regulations

  19. Financial Performance

  20. Capital Improvement Plan Summary (2007-2011 : $181mm)

  21. Capital Improvement Plan Detail Water • Construction of 25 miles of water transmission main and lines (12” to 36”) • Expansion of the Catawba River Water Treatment Plant increasing the County’s allocation from 18MGD to 30MGD • Construction of 8MGD Northern Union County Water Treatment Plant • Construction of 3 elevated storage tanks with combined capacity of 4MG Sewer • Rerating (+0.5MGD) and expansion (+3.0MGD) of the 12 Mile Creek Wastewater Treatment Plant (after completion a 6MGD plant) • Expansion (+3MGD from 6MGD to 9MGD) 12 Mile Creek Wastewater Treatment Plant • NO COSTS FOR TREATMENT OR CONVEYANCE OF YADKIN/PEE DEE BASIN SEWER ($78M)

  22. Financial Forecast

  23. Rate Affordability Compliance *Acceptable Water/Sewer Burden is equal to 1.5% of the County's median household income. This threshold is set by the North Carolina General Assembly through the NC Clean Water Revolving Loan and Grant Act of 1987 in establishing high-unit cost for utilities.

  24. Debt Service Coverage BOCC Standard All Debt 1X; Credit Requirements – Senior 2.1 to 2.5X

  25. Working Capital Requirements BOCC Standard 365 days; NC systems 385-438 days (Source: LGC)

  26. Summary • policy leadership decision making • relevant and valid information • deliberate • considerations

  27. Next Steps ….. Policy leadership decisions • What financial resources are available to invest in the utility system? Size of CIP $181 and higher?? ==> PayGo, Debt and Capital Contributions • What types of investments should be made? Historically, CIP includes “backbone infrastructure” projects that benefit large #’s of customers • What options are available to make water resources more available and who pays? Self-help … 1¢ for extension of distribution system

  28. Additional policy leadership decisions • Capital Improvement Plan – Major wastewater decisions absent – March meeting to review CIP • Business Plan – Revisions to CIP will require update • Capacity Fees – Revisions to CIP will necessitate update to fees; tiered 3/4” residential based on sq. ft. • Rates – CIP and Business Plan will likely necessitate review • Water extension line policy

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