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10.1. SR 11-01-2021 Request for Action To Item Number Mayor and City Council 10.1 Agenda Section Meeting Date Prepared by General Business November 1, 2021 Justin Femrite, P.E., Public Works Director Item Description Reviewed by Sewer Revenue Adequacy Report Lori Ziemer, Finance Director Reviewed by Calvin Portner, City Administrator Action Requested Review completed Sewer Revenue Adequacy Report Background/Discussion Upon review of the proposed 2021 sewer budget, there remained question about the fees we charge and any proposed annual adjustments. From this feedback, staff engaged AE2S to study our fund and associated revenues to help forecast appropriate rates and access charges moving forward. Financial Impact None at this time. We propose to use this report as a guide for establishing rates over the next five years. Mission/Policy/Goal Responsible for every dollar – good stewards Attachments  Sewer Revenue Adequacy Report  Elk River Municipal Utilities Water Cost Study The Elk River Vision A welcoming community with revolutionary and spirited resourcefulness, exceptional service, and community engagement that encourages and inspires prosperity. Updated: August 2020 To: City of Elk River From: Miranda Kleven, PE Dylan Walski Re: Sewer Revenue Adequacy Date: October 21, 2021 INTRODUCTION The City of Elk River retained AE2S Nexus to complete a Sewer Revenue Adequacy Analysis to assist with short-term financial planning and rate-setting for its Sewer Utility. AE2S Nexus developed a five-year financial plan that includes projected sewer rates designed to meet projected annual revenue requirements and fund capital reserves. AE2S Nexus also compared existing Sewer Access Charges to similar charges for peer communities. The scope of services consisted of the following items: Data Collection and Review Sewer Access Charges Regional Comparison Revenue Adequacy Analysis Develop rate recommendations to meet revenue adequacy Documentation and Delivery of Final Results Prepare Summary Memorandum documenting results Present the results to the City Council, either in person or via electronic media UTILITY REVENUES Sewer Utility generates revenue through volumetric charges to approximately 5,379 users within the City of Elk River, as well through the treatment of leachate from the Elk River Landfill. City users consist of residential and commercial connections whose discharges are generally homogeneous. They are collectively referred to herein as Domestic users. Domestic users within the City pay a volumetric charge of $5.07 per thousand gallons of sewer discharged, with a minimum bill per account of $11.75 per month. The landfill is charged $0.01340 per Project Number Page 1 of 20 Think Big. Go Beyond. www.ae2s.com W:\\E\\Elk River\\2021 Sewer Revenue Adequacy\\Reports\\Financial Memo -Final revised.docx Summary Memorandum Re: Sewer Revenue Adequacy October 21, 2021 gallon or $13.40 per thousand gallons of leachate discharged to the sewer system. At the current rates, revenue from the Domestic users is approximately $195,000 per month, and revenue from the landfill is approximately $13,000 per month. Table 1 summarizes the total revenues projected for the utility in 2021 and 2022, based on an assumed domestic user account growth rate of 1.3 percent. Table 1: Projected Sewer Utility Rate Revenues Projected 2022 City of Elk River Sewer Revenues Projected 2021 Domestic User Fees $2,343,684 $2,374,102 Leachate Discharge Fees $160,800 $160,800 Miscellaneous Revenues $50,500 $100,500 Sewer Access Charges (SAC) $100,000 $500,000 Total Projected Revenues $2,654,934 $3,135,402 ASSUMPTIONS The first step in evaluating revenue adequacy is to develop total revenue requirement projections. Assumptions upon which the revenue adequacy analysis is based are listed below. Elk River Rate (2021): $5.07 volumetric fee per thousand gallons; minimum monthly charge per account of $11.75 Domestic (City) user accounts: 5,379 Leachate user accounts: 1 Leachate rate (2021): $13.40 per thousand gallons Wastewater flow: 1.33 million gallons per day (MGD) in 2020, and 1.32 MGD in 2021 Annual capital outlay is paid for through rate revenues 2020C debt is retiring 2014B Debt Year-end 2020 Sewer Cash Balance= $6,344,631 Operating Reserve Target: 180 days Contribution to capital reserves based on estimated net system value of $30.7 million (M) Annual inflation: 5% in 2022, 4% in 2023, and 3% from 2024 and thereafter Annual domestic account and flow growth rate: 1.3% Debt service reserve fund: Target based on annual debt payment Required Debt Service Coverage = 105% Capital reserve fund based on funding depreciation Placeholder value for Capital Improvement Plan (CIP) projects: Average of 2022 projects CIP placeholder values are inflated annually Project Number Page 2 of 20 Think Big. Go Beyond. www.ae2s.com Summary Memorandum Re: Sewer Revenue Adequacy October 21, 2021 EVALUATION OF REVENUE REQUIREMENTS Total revenue requirements consist of Operation and Maintenance (O&M) related components and Capital-related components (debt, rate-funded capital, and reserves), as shown in Figure 1. Figure 1: Total Revenue Requirements Table 2 Summarizes the O&M budget for 2021. The indexing factors noted in the assumptions were applied to generate O&M-related revenue requirements for the period of 2022 through 2026, shown in Table 3. Table 2: City of Elk River Sewer Operations Budget 2021 City of Elk River Budget Line Items Sewer O&M Budget (2021) Personal Services $743,800 Supplies $260,100 Services & Charges $700,400 Transfer Out $160,000 Total O&M Budget $1,864,300 Project Number Page 3 of 20 Think Big. Go Beyond. www.ae2s.com Summary Memorandum Re: Sewer Revenue Adequacy October 21, 2021 Table 3: City of Elk River Sewer O&M Projections 2022-2026 City of Elk River Projected Projected Projected Projected Projected Budget Line Items 2022 2023 2024 2025 2026 Personal Services $760,300 $790,712 $814,433 $838,866 $864,032 Supplies $279,500 $290,680 $299,400 $308,382 $317,634 Services & Charges $803,350 $835,484 $860,549 $886,365 $912,956 Transfer Out $165,000 $165,000 $165,000 $165,000 $165,000 Total O&M Budget $2,008,150 $2,081,876 $2,139,382 $2,198,614 $2,259,622 Information provided by the City indicates two debt issuances, the most recent of which will be applied to pay off the first issuance in early 2022. Table 4 summarizes the projected annual debt service revenue requirements for the Sewer Utility. Table 4: City of Elk River Sewer Debt Service Projections 2022-2026 City of Elk River Debt Projected Projected Projected Projected Projected Issuances 2022 2023 2024 2025 2026 2014B $608,650 $- $- $- $- 2020C $- $592,000 $586,800 $591,600 $591,300 Annual Debt Service $608,650 $592,000 $586,800 $591,600 $591,300 Payments The City budgets annually for equipment replacement, along with capital projects identified in the Sewer CIP. These items compose the annual rate-funded capital portion of the Capital- related revenue requirements and are show in Table 5. Project Number Page 4 of 20 Think Big. Go Beyond. www.ae2s.com Summary Memorandum Re: Sewer Revenue Adequacy October 21, 2021 Table 5: City of Elk River Sewer CIP and Planned Capital Equipment Funding Project 2021 2022 2023 2024 2025 2026 Source Sewer Equipment Rate Revenue $103,000 Lift Station Rate Revenue $61,800 $50,000 $50,000 $50,000 $50,000 Improvements CIP Placeholder Rate Revenue $84,752 $87,418 $90,041 $92,742 Budgeted Capital Rate Revenue $135,000 $460,000 $247,500 $256,425 $265,618 $275,086 Outlay* Total $135,000 $624,800 $382,372 $393,843 $405,659 $417,828 * Accounts for budgeted items such as vehicles, sewer camera, major equipment, etc. The last component of the Capital-related revenue requirements is that associated with contributions to Renewal/Replacement (R&R) reserves. Discussion of R&R contributions is included in the following section. Capital Renewal/Replacement Reserve Considerations The establishment of rates that represent full cover recovery is key to ensuring financial health The at approximately $20 million (M) has been invested in the collection system since the late 1970s, meaning the oldest pipelines are 40 to 50 years old. With pipeline life expectancies ranging from 50 to 100 years in some cases, It is likely that the City will soon see significant pipeline renewal needs if it has not to date. Records also indicate that the existing wastewater treatment infrastructure came online in 2017, Given this is relatively new, there has likely been little renewal/replacement (R&R) needed at that facility. Due to growth-related revenue from Sewer Access Charges (SAC), the Sewer Utility currently has strong reserve balances, which is favorable for meeting near-term capital needs. By adopting a rate-setting approach that includes a capital component associated with on- going R&R, the City has the ability to phase in the necessary adjustments over multiple years, using existing reserves in the interim to cover any revenue shortfalls. The measurement of full cost refers to the cost of system operation, as well as use of the capital components in service. The cost of the latter is most commonly represented as depreciation. Full-cost recovery requires that at a minimum, the revenue generated by the rate , and is important for two reasons: 1. To promote the generation of adequate revenue to cover annual revenue requirements, including periodic renewal required to maintain system value. Project Number Page 5 of 20 Think Big. Go Beyond. www.ae2s.com Summary Memorandum Re: Sewer Revenue Adequacy October 21, 2021 2. To support generational equity each annual configuration of users pays its fair share for use of the infrastructure in service. Figure 2 illustrates both of these points. The top line indicates system value in the absence of inflation. This value decreases over time as the system depreciates, represented by the green system is operating at a level providing consistent service. As a result, all users throughout the timeline receive the same benefit, regardless of system age. It is, therefore, the responsibility of all users along the timeline to contribute in a manner that maintains the value of the system, by system, rate-funded capital renewal, or through funding reserves for future R&R. This both maintains system value and ensures that each generation of users along the timeline pays its fair share. Figure 2: Illustration of Funding Depreciation and Generational Equity To support the development of a financial plan based on full-cost pricing, AE2S Nexus evaluated capital reserve needs based on current depreciation values and the forecasted renewal needs in the CIP. Table 6 summarizes the projected annual contributions to capital R&R reserves using depreciation as a basis. Project Number Page 6 of 20 Think Big. Go Beyond. www.ae2s.com Summary Memorandum Re: Sewer Revenue Adequacy October 21, 2021 Table 6: Projected Annual Contribution to Renewal/Replacement Capital Reserves 2021 2022 2023 2024 2025 2026 Estimated Annual $1,656,777 $1,814,565 $1,870,802 $1,928,781 $1,988,555 $1,814,565 Depreciation Less Debt Service Principal $(442,228) $(453,284) $(520,000) $(520,000) $(530,000) $(535,000) Less Rate-Funded Capital $(135,000) $(624,800) $(382,372) $(393,843) $(405,658) $(417,828) Net Contribution to Capital $1,079,549 $664,992 $912,193 $956,959 $993,123 $1,035,727 Reserve While funding depreciation is the minimum standard for full-cost pricing, it is just one approach to capital reserve funding. Due to inflationary factors, funding depreciation based on the original cost of an asset will not generally result in the generation of adequate funds to make full t for a prescribed useful life, and in reality, can remain in use much longer or shorter than general guidelines would predict. As a result, the approach to capital R&R reserve funding is a utility- specific choice that warrants discussion amongst the utility managers and decision makers. There are generally three broad approaches, summarized in Figure 3. Figure 3: Capital Reserve Funding Strategies The first approach is what is previously described, whereby depreciation is measured against principal payment and rate-funded capital to develop a reserve contribution that ensures the depreciation is indexed to account for the effect of inflation. This approach can involve indexing current depreciation values, or in cases where the utility has a well-developed CIP that accounts for the future cost of replacement, can involve ingthe future replacement value to result in an annual R&R contribution that is reflective of the future capital cost. The third approach is the most specific and involves a well-defined CIP based on an understanding of condition and realistic useful lives for the assets. For the purpose of this study, scenarios have been developed that base R&R reserve contributions on straight-line depreciation and indexed depreciation. Project Number Page 7 of 20 Think Big. Go Beyond. www.ae2s.com Summary Memorandum Re: Sewer Revenue Adequacy October 21, 2021 Total Projected Revenue Requirements Table 7 summarizes the total projected Sewer revenue requirements for 2022 through 2026. The R&R reserve contributions in Table 7 are based on funding depreciation. Table 7: Projected City of Elk River Sewer Revenue Requirements 2022-2026 Projected Projected Projected Projected Projected Revenue Requirements 2022 2023 2024 2025 2026 O&M $2,008,150 $2,081,876 $2,139,382 $2,198,614 $2,259,622 Capital: Debt Service $608,650 $592,000 $586,800 $591,600 $591,300 Capital: Rate-Funded CIP $624,800 $382,372 $393,843 $405,659 $417,828 Capital: R&R Reserves $664,992 $912,193 $956,959 $993,123 $1,035,727 Total Revenue $3,308,494 $3,530,546 $3,769,250 $4,027,635 $4,307,730 Requirements Project Number Page 8 of 20 Think Big. Go Beyond. www.ae2s.com SummaryMemorandum Re: Sewer Revenue Adequacy October 21, 2021 REVENUE ADEQUACY SCENARIOS Revenue adequacy is evaluated to determine the short-term and long-term adequacy of the existing rate schedule, and to propose potential rate adjustments to ensure that the existing s financial position in the future. Figure 4depicts the Baseline revenue adequacy scenario, in which no changes to the existing rates are madeand revenue requirements are as presented in Table 7. Figure 5 shows the projected cash balances under the Baseline Scenario. Under the Baseline Scenario, the utility would experience a revenue deficiency each year of the study period. Because the Sewer Utility currently has strong reserve funds, cash balances would remain at or exceeding target levels through the study period. However, full cost recovery would not be achieved. It is important to note that the existing CIP may not be fully developed, and that additional capital renewal needs may become apparent within the study period, which could quickly deplete existing reserve funds. The Baseline Revenue Adequacy approach, which does not involve changes to the existing rates, is not recommended. Total Revenues vs. Total Expenses υЎͲЉЉЉͲЉЉЉ υЍͲЉЉЉͲЉЉЉ υЌͲЉЉЉͲЉЉЉ υЋͲЉЉЉͲЉЉЉ υЊͲЉЉЉͲЉЉЉ υЉ ЋЉЋЊЋЉЋЋЋЉЋЌЋЉЋЍЋЉЋЎЋЉЋЏ ΏυЊͲЉЉЉͲЉЉЉ ƚƷğƌ wĻǝĻƓǒĻƭƚƷğƌ wĻǝĻƓǒĻ wĻƨǒźƩĻƒĻƓƷƭtƩƚƆĻĭƷĻķ wĻǝĻƓǒĻ {ǒƩƦƌǒƭΉΛ5ĻŅźĭźĻƓĭǤΜ Figure 4: Baseline Revenue Adequacy Projections Although the revenue requirements associated with Figures 4and 5are based on contributions to R&R reserves listed in Table 7, actual contributions to R&R reserves for the Baseline scenario are less due to the revenue deficiency (Table 8). Project Number Page 9of 20 Think Big. Go Beyond.www.ae2s.com SummaryMemorandum Re: Sewer Revenue Adequacy October 21, 2021 Projected Sewer Fund Balances $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $- 202120222023202420252026 Debt Service ReserveO&M Reserve Account Renewal & Replacement Capital ReserveO&M Reserve Account Target Debt Service Reserve Target Figure 5: Projected Cash Balances Baseline Analysis Table 8: Actual Contribution to R&R Reserves Baseline Scenario Projected Projected Projected Projected Projected 20222023202420252026 Budgeted Contribution to $581,989$759,398$749,675$729,661$714,346 Capital Reserves Actual Projected Contribution ($106,198)$110,017$77,504$33,328($7,467) to Reserves Rate Adjustment Scenarios To meet the objective of full cost recovery and to work toward eliminatingthe revenue deficiency, two rate scenarios were developed: 1.Achieve Revenue Sufficiency and Full Cost Recovery (based on funding depreciation) in Five (5) Years; and 2.Achieve Revenue Sufficiency and Full Cost Recovery (based on funding indexed depreciation) in 10 Years. Project Number Page 10of 20 Think Big. Go Beyond.www.ae2s.com SummaryMemorandum Re: Sewer Revenue Adequacy October 21, 2021 Scenario 1 Figure 6illustrates revenue adequacy associated with Scenario 1, in which the existing sewer rates are adjusted to eliminate the revenue deficiency by 2026. Figure 7 shows the projected cash balances associated with Scenario 1. The aggregate revenue increase of 6.2 percent in Figure 7 reflects both the increase to the rates and growth-related revenue. Total Revenues vs. Total Expenses $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 202120222023202420252026 -$1,000,000 Total RevenuesTotal Revenue RequirementsProjected Revenue Surplus/(Deficiency) Figure 6: Scenario 1 Revenue Adequacy Projections Projected Sewer Fund Balances $10,000,0007.0% 6.0% $8,000,000 5.0% $6,000,000 4.0% 3.0% $4,000,000 2.0% $2,000,000 1.0% $-0.0% 202120222023202420252026 Debt Service ReserveO&M Reserve Account Renewal & Replacement Capital ReserveO&M Reserve Account Target Debt Service Reserve TargetAggregate Revenue Increase Figure 7: Projected Cash Balances Scenario 1 Project Number Page 11of 20 Think Big. Go Beyond.www.ae2s.com Summary Memorandum Re: Sewer Revenue Adequacy October 21, 2021 Table 9 summarizes the projected rate adjustments and rates for Scenario 1. Given current account numbers, flow numbers, and the assumed growth rate of 1.3 percent annually, annual in goals by 2026. Per agreement parameters associated with current significant industrial users, the leachate charge would increase by three percent annually. Beyond 2026, it is assumed that rate adjustments would continue at a pace equal to at least inflation, unless significant capital requirements are identified that increase the projected revenue requirements. As shown in Figure 6, the rates in Table 9 are designed to generate revenue that matches revenue requirements by 2026. Because the Capital-related revenue requirements associated with the rates in Table 9 are based on fully funding depreciation, once the revenue deficiency is eliminated, the Sewer Utility would successfully have built its rate structure for full-cost recovery based on depreciation. In the interim period of 2022 through 2025, contributions to capital reserves are projected to fall short of funding depreciation. Table 10 summarizes the calculated R&R reserve portion of Capital-related revenue requirements and the actual projected contribution to capital R&R reserves based on the projected revenue deficiency. Table 9: Projected Rate Adjustments and Rates: Scenario 1 Scenario 1 Current 2022 2023 2024 2025 2026 Domestic Annual Change 5.0% 5.0% 5.0% 5.0% 5.0% Domestic Volumetric charge per thousand $5.07 $5.33 $5.60 $5.88 $6.18 $6.49 gallons Change in Domestic charge per thousand gallons +$0.26 +$0.27 $0.28 +$0.30 +$0.31 Domestic Fixed Minimum Monthly Charge $11.75 $12.34 $12.96 $13.61 $14.29 $15.01 Change in Domestic charge per month +$0.59 +$0.62 $0.65 +$0.68 +$0.72 Leachate Annual Change 3.0% 3.0% 3.0% 3.0% 3.0% Leachate Volumetric Charge per thousand $13.40 $13.80 $14.21 $14.64 $15.08 $15.53 gallons Change in Leachate Charge per thousand gallons +$0.40 +$0.41 +$0.43 +$0.44 +$0.45 Project Number Page 12 of 20 Think Big. Go Beyond. www.ae2s.com Summary Memorandum Re: Sewer Revenue Adequacy October 21, 2021 Table 10: Actual Projected Contribution to R&R Reserves Scenario 1 Projected Projected Projected Projected Projected 2022 2023 2024 2025 2026 Budgeted Contribution to $581,989 $759,398 $749,675 $729,661 $714,346 Capital Reserves Actual Projected Contribution $19,529 $369,931 $480,448 $591,590 $716,156 to Reserves Table 11 summarizes the projected Scenario 1 monthly billing impacts for Domestic users. Table 11: Domestic Bill Projections Scenario 1 Thousand gallons per 2021 2022 2023 2024 2025 2026 month 2 $11.75 $12.34 $12.96 $13.61 $14.29 $15.01 4 $20.28 $21.32 $22.40 $23.52 $24.72 $25.96 6 $30.42 $31.98 $33.60 $35.28 $37.08 $38.94 8 $40.56 $42.64 $44.80 $47.04 $49.44 $51.92 10 $50.70 $53.30 $56.00 $58.80 $61.80 $64.90 21 $106.47 $111.93 $117.60 $123.48 $129.78 $136.29 50 $253.50 $266.50 $280.00 $294.00 $309.00 $324.50 250 $1,267.50 $1,332.50 $1,400.00 $1,470.00 $1,545.00 $1,622.50 Project Number Page 13 of 20 Think Big. Go Beyond. www.ae2s.com SummaryMemorandum Re: Sewer Revenue Adequacy October 21, 2021 Scenario 2 Figure 8illustrates revenue adequacy associated with Scenario 2, in which the existing sewer rates are adjusted to eliminate the revenue deficiency by 2031. Figure 9shows the projected cash balances associated with Scenario 2. The aggregate revenue increase of5.7 percent in Figure 9reflects both the increase to the rates and growth-related revenue. Total Revenues vs. Total Expenses $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $0 202120222023202420252026 -$1,000,000 Total RevenuesTotal Revenue RequirementsProjected Revenue Surplus/(Deficiency) Figure 8: Scenario 2Revenue Adequacy Projections Projected Sewer Fund Balances $10,000,0006.0% 5.0% $8,000,000 4.0% $6,000,000 3.0% $4,000,000 2.0% $2,000,000 1.0% $-0.0% 202120222023202420252026 Debt Service ReserveO&M Reserve Account Renewal & Replacement Capital ReserveO&M Reserve Account Target Debt Service Reserve TargetAggregate Revenue Increase Figure 9: Projected Cash Balances Scenario 2 Project Number Page 14of 20 Think Big. Go Beyond.www.ae2s.com Summary Memorandum Re: Sewer Revenue Adequacy October 21, 2021 Table 12 summarizes the projected rate adjustments and rates for Scenario 2. Given current account numbers, flow numbers, and the assumed growth rate of 1.3 percent annually, annual increases to the volumetric and minimum rate of 4.5 percent (through 2031) would achieve the 31. Per agreement parameters associated with current significant industrial users, the leachate charge would increase by three percent annually. As noted, the rates in Table 12 are designed to generate revenue that matches revenue requirements by 2031; as a result, a revenue deficiency is shown in Figure 8 for the period of 2022 through 2026. Because the Capital-related revenue requirements associated with the rates in Table 12 are based on fully funding inflated depreciation, once the revenue deficiency is eliminated in 2031, the Sewer Utility would successfully have built its rate structure for full-cost recovery based on a value more closely resembling full replacement value than depreciation alone. In the interim period of 2022 through 2030, contributions to capital reserves are projected to fall short of funding inflated depreciation. Table 13 summarizes the calculated R&R reserve portion of Capital-related revenue requirements and the actual projected contribution to capital R&R reserves based on the projected revenue deficiency for the period of 2022 through 2026. Figure 10 provides a comparison of the target annual contribution to R&R reserves and the projected actual contribution for Scenarios 1 and 2. Table 12: Projected Rate Adjustments and Rates: Scenario 2 Scenario 2 Current 2022 2023 2024 2025 2026 Annual Change 4.5% 4.5% 4.5% 4.5% 4.5% Domestic Volumetric charge per thousand $5.07 $5.30 $5.54 $5.79 $6.05 $6.32 gallons Change in Domestic charge per thousand gallons +$0.23 +$0.24 +$0.25 +$0.26 +$0.27 Domestic Fixed Minimum Monthly Charge $11.75 $12.27 $12.82 $13.39 $13.99 $14.61 Change in Domestic charge per month +$0.52 +$0.55 +$0.57 +$0.60 +$0.62 Leachate Annual Change 3.0% 3.0% 3.0% 3.0% 3.0% Leachate Charge per thousand gallons $13.40 $13.80 $14.21 $14.64 $15.08 $15.53 Change in Leachate Charge per thousand gallons +$0.40 +$0.41 +$0.43 +$0.44 +$0.45 Project Number Page 15 of 20 Think Big. Go Beyond. www.ae2s.com Summary Memorandum Re: Sewer Revenue Adequacy October 21, 2021 Table 13: Actual Projected Contribution to R&R Reserves Scenario 2 Projected Projected Projected Projected Projected 2022 2023 2024 2025 2026 Budgeted Contribution to $664,992 $912,193 $956,959 $993,123 $1,035,727 Capital Reserves Actual Projected Contribution $5,449 $341,408 $436,436 $528,398 $631,916 to Reserves $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 20222023202420252026 Scenario 1 - Actual ProjectedScenario 2 - Actual Projected Scenario 1 TargetScenario 2 Target Figure 10: Comparison of R&R Reserves Scenarios 1 and 2 Table 15 summarizes the projected Scenario 2 monthly billing impacts for Domestic users. Project Number Page 16 of 20 Think Big. Go Beyond. www.ae2s.com Summary Memorandum Re: Sewer Revenue Adequacy October 21, 2021 Table 14: Domestic Bill Projections Scenario 2 Thousand gallons per 2021 2022 2023 2024 2025 2026 month 2 $11.75 $12.27 $12.82 $13.39 $13.99 $14.61 4 $20.28 $21.20 $22.16 $23.16 $24.20 $25.28 6 $30.42 $31.80 $33.24 $34.74 $36.30 $37.92 8 $40.56 $42.40 $44.32 $46.32 $48.40 $50.56 10 $50.70 $53.00 $55.40 $57.90 $60.50 $63.20 21 $106.47 $111.30 $116.34 $121.59 $127.05 $132.72 50 $253.50 $265.00 $277.00 $289.50 $302.50 $316.00 250 $1,267.50 $1,325.00 $1,385.00 $1,447.50 $1,512.50 $1,580.00 BENCHMARKING AE2S Nexus conducts a rate survey annually to provide comparisons for systems across the region. Figure 11 presents total 2021 monthly bills associated with 6,000 gallons of sewer discharge for Minnesota communities located outside of the Minneapolis/St. Paul metro area. Figure 12 is based on rate information obtained from the 2021 rate survey and provides a comparison of rates for Elk River Sewer Access Charges. Based on conversations with City staff it is understood that Elk River primarily uses SAC revenues to fund debt service. Based on this assumption, the existing SAC charge appears to be appropriate. As the City works to further develop its CIP, a review of the basis for the SAC should be completed to ensure that it adequately keeps pace with the benefit in terms of cost associated with connecting to the Sewer System. Project Number Page 17 of 20 Think Big. Go Beyond. www.ae2s.com Summary Memorandum Re: Sewer Revenue Adequacy October 21, 2021 Figure 11: 2021 AE2S Utility Rate Survey Monthly Sewer Bills for Minnesota Systems serving greater than 5,000 Project Number Page 18 of 20 Think Big. Go Beyond. www.ae2s.com SummaryMemorandum Re: Sewer Revenue Adequacy October 21, 2021 Single Family Sewer Access Charge (SAC) Anoka $2,000 Andover $2,485 Ramsey $2,485 Blaine $2,485 Otsego $2,641 Dayton $3,294 Becker $4,000 St. Francis $4,284 Rogers $4,400 Monticello $4,423 Albertville $4,600 St. Michael $5,243 Big Lake $5,325 Elk River $5,545 Buffalo $7,087 Zimmerman $7,250 $- $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 Figure 12: 2021 SAC Comparison Project Number Page 19of 20 Think Big. Go Beyond.www.ae2s.com Summary Memorandum Re: Sewer Revenue Adequacy October 21, 2021 SUMMARY OF FINDINGS AND RECOMMENDATIONS years old. Anticipating that significant renewal and replacement of Sewer infrastructure will be coming in the near future, the City has identified the need to develop a rate strategy designed to achieve full cost recovery and support future renewal and replacement. The following recommendations have been developed for consideration moving forward. For 2022, adopt increases of five percent (5.0%) for the Sewer volumetric and minimum charges for Domestic (City) users. Because the rate adjustment projections for Scenarios 1 and 2 are very similar, we recommend adopting the Scenario 1 adjustment for 2022 and discussing the desired future approach over the course of the next year in conjunction with capital planning discussions. For 2022, adopt a three percent (3.0%) increase to the volumetric charge for leachate treatment. Consider annually indexing this charge by three percent, as has generally been the practice. Further develop the Sewer Utility CIP to identify strategic infrastructure renewal and replacement items for the next 10- for on-going reserve-planning, and that will change over time. Adopt a strategy/policy for capital R&R planning that can guide City staff in setting future rates and prioritizing capital. Adopt an approach to rate planning that incorporates full-cost pricing and eliminates the revenue deficiency over an identified planning period. Revisit this plan annually and determine whether to continue funding depreciation only or to fund a value more closely representing the future costs of infrastructure replacement. Inform decision-makers and the public as to your goals and approach to financial sustainability. This should include a look-ahead at potential rate adjustments for future years, with the explanation that the City will review annually and adjust to reflect current conditions. Based on recent growth, it appears that the existing SAC will be adequate to address debt service requirements in 2022 unless additional capital investment will be needed in the near- term to accommodate the new growth. However, the City could justify an increase to the SAC in 2022 based on the most recent construction cost indices, which indicate that construction costs have increased in the range of five to six percent from 2020 to 2021. If new infrastructure is required to accommodate growth in the near future, the SAC should be reviewed at that time. AE2S Nexus appreciates the opportunity to assist the City with this effort. If there are any questions regarding information within this Summary Memorandum, please do not hesitate to contact us at (701) 746-8087. Project Number Page 20 of 20 Think Big. Go Beyond. www.ae2s.com WATER COST OF SERVICE AND RATE DESIGN STUDY Final Report May 19, 2020 REPORT OUTLINE Cover Letter Section 1 - Introduction Section 2 Projected Operating Results Existing Rates Section 3 Cost of Service Section 4 Proposed Rates May 19, 2020 Elk River Municipal Utilities Commission 13069 Orono Parkway PO Box 430 Elk River, MN 55330 Subject: Water Rate Study Commission Members: Dave Berg Consulting, LLC has undertaken a study of the retail rates Elk River Municipal Utilities (ERMU) charges its customers for water service. This report summarizes the analyses undertaken and the resulting recommendations for changes to the existing rates. At this time, I am not recommending any changes in the current retail water rates which have been in place since the beginning of this year. Thank you for the opportunity to be of service to ERMU through the conduct of this study. I wish to express my appreciation for the valuable assistance I received from ERMU staff relative to the execution of this study. Sincerely, Dave Berg Consulting, LLC David A. Berg, PE Principal 5ĻķźĭğƷĻķ Ʒƚ ƦƩƚǝźķźƓŭ ƦĻƩƭƚƓğƌ ƭĻƩǝźĭĻ Ʒƚ ĭƚƓƭǒƒĻƩΏƚǞƓĻķ ǒƷźƌźƷźĻƭ Dave Berg Consulting, LLC | 15213 Danbury Ave W, Rosemount, MN 55068 | 612-850-2305 www.davebergconsulting.com Section 1 Introduction The City of Elk River, MN owns a municipal utility providing service to approximately 5,300 retail water customers. The water utility is operated by Elk River Municipal Utilities (ERMU) and is under the direction of the Elk River Municipal Utilities Commission. This report has been prepared by Dave Berg Consulting, LLC to examine the rates and charges for water service in Elk River. The study includes an examination of the allocated cost of service based on actual 2019 utility operations (Test Year). It also includes projected operating results for 2020-2024 (Study Period). As a result of the analyses undertaken and reported on herein, water rate recommendations have been developed for implementation by ERMU. - 1 - Section 2 Projected Operating Results Existing Rates The rates charged for water service by ERMU, combined with other operating and non- operating revenues, must be sufficient to meet the cost of providing services to ERMU retail water customers. This is necessary to ensure the long-term financial health of the ERMU water utility. The cost of providing utility service consists of normal operating expenses such as production, pumping, distribution, customer and A&G functions, system depreciation expenses, capital improvements and other non-operating expenses. An analysis of the operating results for the ERMU water utility during the 2020-2024 Study Period has been performed assuming the current retail rates and charges remain in effect through the Study Period. This analysis has been done to determine the overall need, if any, for additional revenue through rates to meet projected revenue requirements. The analyses and assumptions utilized in these projections are explained below. Estimated Revenues Existing Rates ERMU sells water to residential, commercial and industrial customers. Total sales to ERMU retail customers for the Study Period are based on ERMU actual 2019 water sales and discussions with ERMU staff. For this analysis, sales are estimated to remain flat during the Study Period. Exhibit 2-A is a summarized listing of ERMU results at existing rates. The historical and projected revenues from retail sales of water are included as Charges for Services under Operating Revenues. The existing rates - 2 - Projected Operating Results Existing Rates utilized in this analysis will be implemented by ERMU effective for 2020. The 2020 rate adjustment represented an overall 1.7% increase in retail water rates. ERMU also receives other miscellaneous operating revenue from other normal operating procedures. These other operating revenues include net revenues from connection maintenance and penalties. Charges for services combined with other operating revenues results in ERMU Revenue Requirements Operating expenses for the water utility are shown in Exhibit 2-A. A more detailed listing of operating expenses is included in Exhibit 3-A following section 3 of this report. The operating expenses are associated with production, pumping, distribution, customer- related, administrative and general expenses. Projected operating expenses have been based on ERMU projections and are assumed to increase an average of 3% per year. ERMU has annual depreciation costs associated with water system investments. Depreciation during the Study Period is based on budgeted ERMU amounts and future capital improvements. Depreciation is a funded non-cash expense that generates monies available for annual capital improvements, debt principal payments and reserves. ERMU-operating income and expenses are primarily associated with investment income, interest payments on outstanding debt and miscellaneous revenue. ERMU also has income from developer and connection fees. - 3 - Section 2 ERMU makes annual normal capital investments in its water system. Annual water capital improvements for the Study Period, as budgeted by ERMU, are shown in Table 2- 1 below. Fiscal Year 2020 2021 2022 2023 2024 Water capital $1,526,800 $1,985,000 $1,228,000 $1,307,000 $1,662,000 ERMU currently has outstanding water debt pursuant to a 2008 general obligation bond issue and a 2010 bond issue related to the Elk River City Hall expansion. The 2008 issue is scheduled to be paid in full in 2022 and the 2010 issue will be paid in 2023. It is assumed the water utilities will participate with the electric utility in a new $13.59 million bond issue in 2021 related to expansion of the ERMU field service facilities. The debt payments associated with $1,359,000 of that issue have been allocated to the water utility. Projected Operating Results Existing Rates Based on the assumptions outlined above, the resulting projected operating results assuming continued application of the existing retail rates are summarized below in Table 2-2. A summary presentation of the historical and projected operating results is also shown in Exhibit 2-A. - 4 - Projected Operating Results Existing Rates Fiscal Year 2020 2021 2022 2023 2024 Operating Revenues $2,313,881 $2,313,881 $2,313,881 $2,313,881 $2,313,881 Less Operating (3,075,390) (3,182,069) (3,305,696) (3,405,814) (3,510,340) Expenses Plus Non -Operating 269,356 179,293 121,150 145,188 146,987 Revenue Plus Fees and 223,370 198,370 198,370 198,370 198,370 Transfers Change in Net Position $(268,783) $(490,525) $(672,295) $(748,374) $(851,101) Net Position as -11.6% -21.2% -29.1% -32.3% -36.8% Percent of Revenues Cash Reserves A summary of the impact of the projected operating results on ERMUunrestricted cash reserves for the Study Period is shown at the end of Exhibit 2-A and in Table 2-3 below. As shown below, under existing retail rates and estimated revenue requirements over the Study Period, the unrestricted cash reserves for the water utility are projected to decrease from $7.7 million to $3.9 million by the end of the Study Period. ERMU has a reserve policy that sets a minimum target for reserves equal to 6 months operating expenses less though the overall reserves decrease during the Study Period, they are consistently above 340% of the ERMU minimum goal. - 5 - Section 2 Fiscal Year 2020 2021 2022 2023 2024 Beginning Balance $7,692,385 $6,841,641 $6,600,848 $5,729,952 $4,995,410 Plus Change in Net (268,783) (490,525) (672,295) (748,374) (851,101) Position Plus Depreciation 1,215,839 1,266,732 1,332,899 1,373,832 1,417,399 Plus New Debt - 1,250,000 - - - Proceeds Less Capital (1,526,800) (1,985,000) (1,228,000) (1,307,000) (1,662,000) Improvements Less Debt Principal (271,000) (282,000) (303,500) (53,000) (29,000) Ending Balance $6,841,641 $6,600,848 $5,729,952 $4,995,410 $3,870,708 Reserve Goal $1,228,605 $1,336,744 $1,091,551 $1,095,971 $1,126,451 Reserves as % of 557% 494% 525% 456% 344% ERMU Goal - 6 - ---- 2024 344% -36.8% page 1 of 1 (1,630) 25,00015,00076,37839,000 (50,981)(29,000) 660,814 332,844158,968146,987 200,000 (851,101)(851,101) Exhibit 2-A 2,273,8812,313,8811,417,3991,022,9053,510,3404,995,4101,417,3993,870,7081,126,451 (1,196,459) (1,049,471) (1,662,000) $ $ $ $ $ $ $ $ $ $ $ $ $ ---- 2023 456% -32.3% (1,630) 25,00015,00074,15439,000 (52,153)(53,000) 641,567323,149993,112158,341145,188200,000 (946,744)(748,374)(748,374) 2,273,8812,313,8811,373,8323,405,8145,729,9521,373,8324,995,4101,095,971 (1,091,933) (1,307,000) $ $ $ $ $ $ $ $ $ $ $ $ $ ---- 2022 525% -29.1% (1,630) 25,00015,00071,99439,000 (75,576) 622,880 313,737964,186157,726121,150 200,000 (991,815)(870,665)(672,295)(672,295)(303,500) 2,273,8812,313,8811,332,8993,305,6966,600,8481,332,8995,729,9521,091,551 (1,228,000) Projected $ $ $ $ $ $ $ $ $ $ $ $ $ --- 2021 494% -21.2% (1,630) 25,00015,00069,89739,000 (16,830) 604,738304,599936,103157,123179,293200,000 (868,188)(688,895)(490,525)(490,525)(282,000) 2,273,8812,313,8811,266,7323,182,0696,841,6411,266,7321,250,0006,600,8481,336,744 (1,985,000) $ $ $ $ $ $ $ $ $ $ $ $ $ --- 2020 557% -11.6% (1,630) 25,00015,00067,86139,00025,000 (26,618) 587,124295,727908,838256,973269,356200,000 (761,509) (492,153) (268,783) (268,783)(271,000) 2,273,8812,313,881 1,215,8393,075,390 7,692,385 1,215,8396,841,641 1,228,605 (1,526,800) $ $ $ $ $ $ $ $ $ $ $ $ $ ---- 2019 13.7% 50,58317,86563,38238,097 (32,939) 516,444223,547719,929248,960254,118428,662315,999 (366,781)(112,663) 2,235,2222,303,6701,147,1492,670,4517,692,385 $ $ $ $ $ $ $ $ $ $ $ --- 2018 33.4% 7,425 52,05218,08137,96925,334 (41,865) 537,719 232,576622,275241,416232,310 123,847 716,810 840,657 (108,463) 2,445,6882,515,8211,193,7452,624,284 $ $ $ $ $ $ $ $ $ $ Elk River Municipal Utilities --- 2017 22.8% 2,348 54,23119,26362,69031,314 (50,354) 500,390154,675896,340227,406210,714799,223530,193 (479,744)(269,030) 2,252,7512,326,2451,191,8942,805,989 Water Operating Results at Existing Rates Historical $ $ $ $ $ $ $ $ $ $ - 2016 27.4% 1,050 34,99917,14275,56524,91773,002 (57,986) 493,385 149,744607,137196,700164,681 358,684 300,000595,747 (300,620)(135,939) 2,121,3802,173,5211,148,3102,474,141 $ $ $ $ $ $ $ $ $ $ - 2015 19.7% 42,54318,89867,48724,66694,703 (65,135)(74,929)(30,000) 465,181168,132582,385177,298136,829253,934189,669433,377 (211,758) 2,141,0962,202,5371,131,1102,414,295 $ $ $ $ $ $ $ $ $ $ Charges for servicesConnection maintenanceCustomer penaltiesProductionDistributionDepreciationCustomer accountsGeneral and administrativeInterest incomeMiscellaneous revenueInterest expense and otherGain (Loss) on sale of capital assetsAs Percent of Revenues Total Operating RevenuesTotal Operating ExpensesTotal Non-Operating Revenues (Expenses)Beginning of YearPlus Change in Net PositionPlus DepreciationPlus New DebtLess Capital ImprovementsLess Debt PrincipalEnd of YearReserve goalPercent of goal OPERATING REVENUESOPERATING EXPENSESOPERATING INCOMENON-OPERATING REVENUE (EXPENSE)Income before Contributions and TransfersDeveloper and Connection FeesContribution of Assets from CityTransfers from Other City FundsTransfers to Other City FundsCHANGE IN NET POSITIONUNRESTRICTED CASH RESERVES Section 3 Cost-of-Service A cost-of-service analysis was performed to determine the allocated cost to serve ERMU within the water utility. Customer classes exist, in part, because the cost to serve different kinds of customers varies. The cost-of-service analysis has been performed on a 2019 actual 2019 financials, operations and sales. The results of the cost-of-service study give an indication of the degree of revenue recovery warranted for each class of customers. A comparison of the allocated cost to serve a class of customers and the actual revenues received from that class is taken into consideration during rate design. Functionalization of Costs ERMUwater revenue requirements have been divided into four functional categories. These categories are described below. Plant costs associated with ERMUsource of supply and pumping. Distribution distribution expenses are related to the ERMU system for delivering water to ERMU customers over the local pipeline system. Customer these costs are fixed costs associated with the service facilities utilized to deliver water directly to customers. They also include items such as meter reading, billing, collections and dealing with customers by customer service representatives. Revenue revenue related costs include certain non-operating revenues and utility margin. - 7 - Section 3 Table 3-1 below summarizes the functional water costs for the 2019 Test Year. The detailed cost functions are shown in Exhibit 3-A. Revenue Component Requirement Plant $1,122,360 Distribution 1,029,888 Customer 96,429 Revenue (11,508) Total $2,237,169 Classification of Costs ERMU classifications. The water cost classifications are described below. Demand Related demand related costs are costs required to meet the overall maximum demand on the system. Demand related costs are predominately associated with facility fixed costs. Commodity Related commodity costs tend to vary with the annual quantity of water produced. Customer Related costs related to serving, metering and billing of individual customers. Revenue Related revenue related costs vary by the amount of revenue received by the utility or are associated with other operating and non-operating revenues. Exhibits 3-B through 3-D show the detailed classification of revenue requirements within the plant, distribution and customer functions. - 8 - Cost-of-Service Allocation of Costs Based on an analysis of customer class service characteristics, the classified costs summarized above were allocated to the major ERMU customer classes. Allocation of costs was performed on a fully-distributed, embedded cost allocation basis. Specific allocation factors were utilized in each of the cost classification categories as described below. Exhibit 3-E contains a summary of the development of the various allocation factors. uti test year commodity requirements was used to allocate commodity related costs. The customer facilities allocator was used to allocate costs associated with the physical facilities required to serve individual customers. For the customer facility allocators, a weighted customer allocation factor is developed. Weighting factors are developed to represent the difference in service configurations between customer classifications. For instance, a larger customer facility is required for a single industrial demand customer than for a single residential customer. The customer service allocator is for allocation of costs associated with customer service meter reading, billing, collections and customer inquiries. As with the customer facilities allocators, weighted customer service allocators are developed - 9 - Section 3 to represent the different levels of customer service required by different size customers. commodity, customer facility and customer service costs. Cost of Service Results Based on the classifications and allocations described above, the estimated cost to serve each major class of customers for the 2019 Test Year was determined. Exhibit 3-F presents this analysis in detail. Table 3-2 below summarizes the total allocated costs for each class compared to the total adjusted revenues received from the class during 2019. Comparison of Cost and Revenues Customer Allocated Revenues Classification Cost to Serve Residential $1,207,117 $1,232,230 Commercial/Industrial 1,030,052 1,004,939 Total $2,237,169 $2,237,169 The revenue requirements and revenues as allocated to each class and summarized above are shown on a total dollar basis. Table 3-3 below makes the comparison based on percentages of total cost to serve and total revenues. The charts following Table 3-3 show a graphical comparison between allocated cost to serve and revenues as a percentage of the totals. The percentage - 10 - Cost-of-Service necessary to produce revenues from each class in accordance withthe allocated cost to serve. The percentage adjustments do not represent the recommended -of-service results are one item for consideration in rate design. It is important to note also that the adjustments shown in the table below would not change the total revenue received by the utility and are not indicative of overall revenue needs of the utility going forward. Recommendations regarding rate design are included in Section 4 of this report. Comparison of % Cost and Revenues Increase/ Customer Allocated Revenues ClassificationCost to Serve (Decrease) Residential54.0%55.1%-2.0% Commercial/Industrial46.0%44.9%2.5% Total100.0%100.0%0.0% -11 - Section 3 As indicated above, ERMUexactlymatch the allocated cost to serve each class. Cost based rates are one of several goals in establishing rates. The relationship between allocated costs and revenues for each class should be considered, in addition to other rate related goals, in developing recommended rates. ERMU currently charges a Water Access Charge (WAC) for new customers. The WAC is a combination of the Water Connection Charge and the Water Availability Charge. The current WAC is $3,764 per WAC unit. A single WAC unit is equivalent to a single residential customer. Water systems require significant capital investment, that investment includes excess capacity in anticipation of new customers. The concept of the WAC is for new customers to buy into the existing system. ERMU has 4,647 residential customers and 609 commercial/industrial customers. The average flow per commercial/industrial customer is 8.3 times as much as the average residential customer flow. Utilizing a WAC weighting of 8 for -12 - Cost-of-Service commercial/industrial customers yields an equivalent WAC unit count of 4,872 (609 times 8). The total WAC unit count for ERMU is 9,519 (4,647 residential plus 4,872 equivalent commercial/industrial units). As of 12/31/2019 ERMU has a total capital cost investment in the water system of $37,982,117. Dividing the investment by the equivalent units yields $3,990 per unit ($37,982,117 divided by 9,519). This compares to the current WAC fee of $3,764. - 13 - Exhibit 3-A Elk River Municipal Utilities Functionalization of 2019 Test Year Water Revenue Requirements 2019 REVENUE REQUIREMENTTEST YEARPlantDistributionCustomerRevenueFunctionalization Basis OPERATING EXPENSES PRODUCTION EXPENSE Maintenance of Structures 57,354 57,354 - - -100% plant TOTAL PRODUCTION EXPENSE 57,354 57,354 - - - PUMPING EXPENSE Supervision 49,455 49,455 - - -100% plant Electric & Gas Utilities 218,681 218,681 - - -100% plant Sampling 13,681 13,681 - - -100% plant Chemical Feed 18,435 18,435 - - -100% plant Maintenance of Electric Pumping - - - - -NA Maintenance of Wells 144,649 144,649 - - -100% plant SCADA - Pumping 3,767 3,767 - - -100% plant TOTAL PUMPING EXPENSE 448,668 448,668 - - - DISTRIBUTION EXPENSE Maintenance of Water Mains 69,733 - 69,733 - -100% distribution Locate Water Lines 15,704 - 15,704 - -100% distribution Locate Water Main - - - - -NA Water Meter Service 41,578 - 41,578 - -100% distribution Maintenance of Customers Service 22,143 - 22,143 - -100% distribution Water Mapping 12,404 - 12,404 - -100% distribution Maintenance of Water Hydrants - PU 18,159 - 18,159 - -100% distribution Maintenance of Water Hydrants - PR 2,897 - 2,897 - -100% distribution Water Clothing/PPE 7,823 - 7,823 - -100% distribution Wages/Water 6,121 - 6,121 - -100% distribution Transportation Expense 11,073 - 11,073 - -100% distribution General Expense/Water Permit 13,733 - 13,733 - -100% distribution TOTAL DISTRIBUTION EXPENSE 221,368 - 221,368 - - DEPRECIATION & AMORTIZATION Depreciation 1,146,324 311,930 834,394 - -fixed assets TOTAL DEPRECIATION 1,146,324 311,930 834,394 - - OTHER OPERATING EXPENSE Dam Maintenance Expense 1,442 1,442 - - -100% plant Pension Expense - - - - -NA OPEB Expense - - - - -NA Interest Paid on Meter Deposit 730 - - 730 -100% customer Rental Property Expense 2,544 1,071 1,380 93 -total operating expenses TOTAL OTHER OPERATING EXPENSE 4,716 2,513 1,380 823 - CONSUMER ACCOUNTS EXPENSE Meter Reading Expense 1,334 - - 1,334 -100% customer Miscellaneous Customer Accounts Expense 60,461 - - 60,461 -100% customer Cust Billings Not Paid - - - - -NA TOTAL CONSUMER ACCOUNTS EXPENSE 61,795 - - 61,795 - ADMINISTRATIVE EXPENSE Salaries Office & Commission 193,488 81,466 104,966 7,056 -total operating expenses Temporary Staffing - - - - -total operating expenses Office Supplies & Expense 16,858 7,098 9,145 615 -total operating expenses LT & Water Consumption 7,355 3,097 3,990 268 -total operating expenses Bank Charges 542 228 294 20 -total operating expenses Legal Fees 6,264 2,637 3,398 228 -total operating expenses Auditing Fees 4,180 1,760 2,268 152 -total operating expenses Insurance 23,391 9,849 12,690 853 -total operating expenses Deferred Comp 14,612 6,152 7,927 533 -total operating expenses Medical/Dental 174,917 73,647 94,892 6,378 -total operating expenses page 1 of 2 Exhibit 3-A Elk River Municipal Utilities Functionalization of 2019 Test Year Water Revenue Requirements 2019 REVENUE REQUIREMENTTEST YEARPlantDistributionCustomerRevenueFunctionalization Basis PERA 41,109 17,309 22,301 1,499 -total operating expenses FICA 38,523 16,220 20,899 1,405 -total operating expenses Sick Pay 26,370 11,103 14,306 962 -total operating expenses Holiday Pay 22,245 9,366 12,068 811 -total operating expenses Vacation & PTO 35,614 14,995 19,320 1,299 -total operating expenses UPMIC Distribution 6,648 2,799 3,607 242 -total operating expenses Mescellaneous - Wellhead - - - - -NA Consulting Fees 4,662 1,963 2,529 170 -total operating expenses Telephone 5,528 2,328 2,999 202 -total operating expenses Advertising 6,575 2,768 3,567 240 -total operating expenses Dues & Subscriptions 43,975 18,515 23,856 1,604 -total operating expenses Travel Expense - - - - -NA Schools & Meetings 19,354 8,149 10,499 706 -total operating expenses Maintenance of General Plant & Office 1,356 571 736 49 -total operating expenses TOTAL ADMINISTRATIVE EXPENSE 693,566 292,019 376,256 25,291 - GENERAL EXPENSE CIP Rebates - Residential 4,005 - - 4,005 -100% customer CIP Rebates - Commercial - - - - -NA CIP - Administration - - - - -NA CIP - Marketing 210 - - 210 -100% customer CIP - Labor 4,226 - - 4,226 -100% customer Environmental Compliance 934 393 507 34 -total operating expenses Misc General Expense 1,234 520 669 45 -total operating expenses TOTAL GENERAL EXPENSE 10,609 913 1,176 8,520 - TOTAL OPERATING EXPENSE 2,644,400 - 1,113,397 1,434,575 96,429 - NON-OPERATING REVENUES (EXPENSES) Interest income 38,097 - - - 38,097 100% revenue Miscellaneous revenue 248,960 - - - 248,960100% revenue Interest expense and other (32,939) (8,963) (23,976) - -fixed assets TOTAL NON-OPERATING REV (EXP) 254,118 (8,963) (23,976) - 287,057 OTHER OPERATING REVENUE Connection maintenance 50,583 - - - 50,583 100% revenue Customer penalties 17,865 - - - 17,865 100% revenue 68,448 - - - 68,448 TOTAL OTHER OPERATING REVENUE Developer and Connection Fees 428,662 - 428,662 - -100% distribution MARGIN 343,997 - - - 343,997100% revenue TOTAL REVENUE REQUIREMENT 2,237,169 1,122,360 1,029,888 96,429 (11,508) page 2 of 2 Exhibit 3-B Elk River Municipal Utilities 2019 Test Year Water Plant Classification FY 2019 REVENUE REQUIREMENTTEST YEARDemandCommodityClassification Basis OPERATING EXPENSES PRODUCTION EXPENSE Maintenance of Structures 57,354 57,354 -100% demand TOTAL PRODUCTION EXPENSE 57,354 57,354 - PUMPING EXPENSE Supervision 49,455 33,146 16,309operating expenses Electric & Gas Utilities 218,681 - 218,681100% commodity Sampling 13,681 - 13,681100% commodity Chemical Feed 18,435 - 18,435100% commodity Maintenance of Electric Pumping - - -NA Maintenance of Wells 144,649 144,649 -100% demand SCADA - Pumping 3,767 - 3,767 100% commodity TOTAL PUMPING EXPENSE 448,668 177,795 270,873 DISTRIBUTION EXPENSE Maintenance of Water Mains - - -NA Locate Water Lines - - -NA Locate Water Main - - -NA Water Meter Service - - -NA Maintenance of Customers Service - - -NA Water Mapping - - -NA Maintenance of Water Hydrants - PU - - -NA Maintenance of Water Hydrants - PR - - -NA Water Clothing/PPE - - -NA Wages/Water - - -NA Transportation Expense - - -NA General Expense/Water Permit - - -NA TOTAL DISTRIBUTION EXPENSE - - - DEPRECIATION & AMORTIZATION Depreciation 311,930 311,930 -100% demand TOTAL DEPRECIATION 311,930 311,930 - OTHER OPERATING EXPENSE Dam Maintenance Expense 1,442 1,442 -100% demand Pension Expense - - -NA OPEB Expense - - -NA Interest Paid on Meter Deposit - - -NA Rental Property Expense 1,071 1,071 -100% demand TOTAL OTHER OPERATING EXPENSE 2,513 2,513 - CONSUMER ACCOUNTS EXPENSE Meter Reading Expense - - -NA Miscellaneous Customer Accounts Expense - - -NA Cust Billings Not Paid - - -NA TOTAL CONSUMER ACCOUNTS EXPENSE - - - ADMINISTRATIVE EXPENSE Salaries Office & Commission 81,466 54,600 26,866operating expenses Temporary Staffing - - -NA Office Supplies & Expense 7,098 4,757 2,341 operating expenses page 1 of 2 Exhibit 3-B Elk River Municipal Utilities 2019 Test Year Water Plant Classification FY 2019 REVENUE REQUIREMENTTEST YEARDemandCommodityClassification Basis LT & Water Consumption 3,097 2,076 1,021 operating expenses Bank Charges 228 153 75operating expenses Legal Fees 2,637 1,768 870operating expenses Auditing Fees 1,760 1,180 580operating expenses Insurance 9,849 6,601 3,248 operating expenses Deferred Comp 6,152 4,123 2,029 operating expenses Medical/Dental 73,647 49,360 24,287operating expenses PERA 17,309 11,601 5,708 operating expenses FICA 16,220 10,871 5,349 operating expenses Sick Pay 11,103 7,441 3,661 operating expenses Holiday Pay 9,366 6,277 3,089 operating expenses Vacation & PTO 14,995 10,050 4,945 operating expenses UPMIC Distribution 2,799 1,876 923operating expenses Mescellaneous - Wellhead - - -NA Consulting Fees 1,963 1,316 647operating expenses Telephone 2,328 1,560 768operating expenses Advertising 2,768 1,855 913operating expenses Dues & Subscriptions 18,515 12,409 6,106 operating expenses Travel Expense - - -NA Schools & Meetings 8,149 5,461 2,687 operating expenses Maintenance of General Plant & Office 571 383 188operating expenses TOTAL ADMINISTRATIVE EXPENSE 292,019 195,717 96,302 GENERAL EXPENSE CIP Rebates - Residential - - -NA CIP Rebates - Commercial - - -NA CIP - Administration - - -NA CIP - Marketing - - -NA CIP - Labor - - -NA Environmental Compliance 393 393 -100% demand Misc General Expense 520 520 -100% demand TOTAL GENERAL EXPENSE 913 913 - TOTAL OPERATING EXPENSE 1,113,397 746,222 367,175 NON-OPERATING REVENUES (EXPENSES) Interest income - - -NA Miscellaneous revenue - - -NA Interest expense and other (8,963) (8,963) -100% demand TOTAL NON-OPERATING REV (EXP) (8,963) (8,963) - OTHER OPERATING REVENUE Connection maintenance - - -NA Customer penalties - - -NA - - - TOTAL OTHER OPERATING REVENUE Developer and Connection Fees - - -NA MARGIN - - -NA TOTAL REVENUE REQUIREMENT 1,122,360 755,185 367,175 page 2 of 2 Exhibit 3-C Elk River Municipal Utilities 2019 Test Year Water Distribution Classification FY 2019DistributionCustomer REVENUE REQUIREMENTTEST YEARDemandFacilitiesClassification Basis OPERATING EXPENSES PRODUCTION EXPENSE Maintenance of Structures - - -NA TOTAL PRODUCTION EXPENSE - - - PUMPING EXPENSE Supervision - - -NA Electric & Gas Utilities - - -NA Sampling - - -NA Chemical Feed - - -NA Maintenance of Electric Pumping - - -NA Maintenance of Wells - - -NA SCADA - Pumping - - -NA TOTAL PUMPING EXPENSE - - - DISTRIBUTION EXPENSE Maintenance of Water Mains 69,733 69,733 -100% Dist demand Locate Water Lines 15,704 15,704 -100% Dist demand Locate Water Main - - -NA Water Meter Service 41,578 - 41,578100% Cust facilities Maintenance of Customers Service 22,143 - 22,143100% Cust facilities Water Mapping 12,404 - 12,404100% Cust facilities Maintenance of Water Hydrants - PU 18,159 - 18,159100% Cust facilities Maintenance of Water Hydrants - PR 2,897 - 2,897 100% Cust facilities Water Clothing/PPE 7,823 4,956 2,867 Operating Expense Wages/Water 6,121 3,877 2,244 Operating Expense Transportation Expense 11,073 7,014 4,059 Operating Expense General Expense/Water Permit 13,733 8,699 5,034 Operating Expense TOTAL DISTRIBUTION EXPENSE 221,368 109,984 111,384 DEPRECIATION & AMORTIZATION Depreciation 834,394 558,799 275,595plant TOTAL DEPRECIATION 834,394 558,799 275,595 OTHER OPERATING EXPENSE Dam Maintenance Expense - - -NA Pension Expense - - -NA OPEB Expense - - -NA Interest Paid on Meter Deposit - - -NA Rental Property Expense 1,380 874 506Operating Expense TOTAL OTHER OPERATING EXPENSE 1,380 874 506 CONSUMER ACCOUNTS EXPENSE Meter Reading Expense - - -NA Miscellaneous Customer Accounts Expense - - -NA Cust Billings Not Paid - - -NA TOTAL CONSUMER ACCOUNTS EXPENSE - - - ADMINISTRATIVE EXPENSE Salaries Office & Commission 104,966 66,492 38,474Operating Expense Temporary Staffing - - -NA Office Supplies & Expense 9,145 5,793 3,352 Operating Expense page 1 of 2 Exhibit 3-C Elk River Municipal Utilities 2019 Test Year Water Distribution Classification FY 2019DistributionCustomer REVENUE REQUIREMENTTEST YEARDemandFacilitiesClassification Basis LT & Water Consumption 3,990 2,528 1,463 Operating Expense Bank Charges 294 186 108Operating Expense Legal Fees 3,398 2,153 1,246 Operating Expense Auditing Fees 2,268 1,436 831Operating Expense Insurance 12,690 8,038 4,651 Operating Expense Deferred Comp 7,927 5,021 2,906 Operating Expense Medical/Dental 94,892 60,110 34,782Operating Expense PERA 22,301 14,127 8,174 Operating Expense FICA 20,899 13,238 7,660 Operating Expense Sick Pay 14,306 9,062 5,244 Operating Expense Holiday Pay 12,068 7,644 4,423 Operating Expense Vacation & PTO 19,320 12,239 7,082 Operating Expense UPMIC Distribution 3,607 2,285 1,322 Operating Expense Mescellaneous - Wellhead - - -NA Consulting Fees 2,529 1,602 927Operating Expense Telephone 2,999 1,900 1,099 Operating Expense Advertising 3,567 2,259 1,307 Operating Expense Dues & Subscriptions 23,856 15,112 8,744 Operating Expense Travel Expense - - -NA Schools & Meetings 10,499 6,651 3,848 Operating Expense Maintenance of General Plant & Office 736 466 270Operating Expense TOTAL ADMINISTRATIVE EXPENSE 376,256 238,343 137,913 GENERAL EXPENSE CIP Rebates - Residential - - -NA CIP Rebates - Commercial - - -NA CIP - Administration - - -NA CIP - Marketing - - -NA CIP - Labor - - -NA Environmental Compliance 507 321 186Operating Expense Misc General Expense 669 424 245Operating Expense TOTAL GENERAL EXPENSE 1,176 745 431 TOTAL OPERATING EXPENSE 1,434,575 908,745 525,829 NON-OPERATING REVENUES (EXPENSES) Interest income - - -NA Miscellaneous revenue - - -NA Interest expense and other (23,976) (16,057) (7,919)plant TOTAL NON-OPERATING REV (EXP) (23,976) (16,057) (7,919) OTHER OPERATING REVENUE Connection maintenance - - -NA Customer penalties - - -NA - - - TOTAL OTHER OPERATING REVENUE Developer and Connection Fees 428,662 287,078 141,584plant MARGIN - - -NA TOTAL REVENUE REQUIREMENT 1,029,888 637,724 392,164 page 2 of 2 Exhibit 3-D Elk River Municipal Utilities 2019 Test Year Water Customer Classification FY 2019 REVENUE REQUIREMENTTEST YEARCustomerClassification Basis OPERATING EXPENSES PRODUCTION EXPENSE Maintenance of Structures - -NA TOTAL PRODUCTION EXPENSE - PUMPING EXPENSE Supervision - -NA Electric & Gas Utilities - -NA Sampling - -NA Chemical Feed - -NA Maintenance of Electric Pumping - -NA Maintenance of Wells - -NA SCADA - Pumping - -NA TOTAL PUMPING EXPENSE - - DISTRIBUTION EXPENSE Maintenance of Water Mains - -NA Locate Water Lines - -NA Locate Water Main - -NA Water Meter Service - -NA Maintenance of Customers Service - -NA Water Mapping - -NA Maintenance of Water Hydrants - PU - -NA Maintenance of Water Hydrants - PR - -NA Water Clothing/PPE - -NA Wages/Water - -NA Transportation Expense - -NA General Expense/Water Permit - -NA TOTAL DISTRIBUTION EXPENSE - - DEPRECIATION & AMORTIZATION Depreciation - -NA TOTAL DEPRECIATION - - OTHER OPERATING EXPENSE Dam Maintenance Expense - -NA Pension Expense - -NA OPEB Expense - -NA Interest Paid on Meter Deposit 730 730100% Customer Rental Property Expense 93 93100% Customer TOTAL OTHER OPERATING EXPENSE 823 823 CONSUMER ACCOUNTS EXPENSE Meter Reading Expense 1,334 1,334 100% Customer Miscellaneous Customer Accounts Expense 60,461 60,461100% Customer Cust Billings Not Paid - -NA TOTAL CONSUMER ACCOUNTS EXPENSE 61,795 61,795 ADMINISTRATIVE EXPENSE Salaries Office & Commission 7,056 7,056 100% Customer Temporary Staffing - -NA Office Supplies & Expense 615 615100% Customer page 1 of 2 Exhibit 3-D Elk River Municipal Utilities 2019 Test Year Water Customer Classification FY 2019 REVENUE REQUIREMENTTEST YEARCustomerClassification Basis LT & Water Consumption 268 268100% Customer Bank Charges 20 20100% Customer Legal Fees 228 228100% Customer Auditing Fees 152 152100% Customer Insurance 853 853100% Customer Deferred Comp 533 533100% Customer Medical/Dental 6,378 6,378 100% Customer PERA 1,499 1,499 100% Customer FICA 1,405 1,405 100% Customer Sick Pay 962 962100% Customer Holiday Pay 811 811100% Customer Vacation & PTO 1,299 1,299 100% Customer UPMIC Distribution 242 242100% Customer Mescellaneous - Wellhead - -NA Consulting Fees 170 170100% Customer Telephone 202 202100% Customer Advertising 240 240100% Customer Dues & Subscriptions 1,604 1,604 100% Customer Travel Expense - -NA Schools & Meetings 706 706100% Customer Maintenance of General Plant & Office 49 49100% Customer TOTAL ADMINISTRATIVE EXPENSE 25,291 25,291 GENERAL EXPENSE CIP Rebates - Residential 4,005 4,005 100% Customer CIP Rebates - Commercial - -NA CIP - Administration - -NA CIP - Marketing 210 210100% Customer CIP - Labor 4,226 4,226 100% Customer Environmental Compliance 34 34100% Customer Misc General Expense 45 45100% Customer TOTAL GENERAL EXPENSE 8,520 8,520 TOTAL OPERATING EXPENSE 96,429 96,429 NON-OPERATING REVENUES (EXPENSES) Interest income - -NA Miscellaneous revenue - -NA Interest expense and other - -NA TOTAL NON-OPERATING REV (EXP) - - OTHER OPERATING REVENUE Connection maintenance - -NA Customer penalties - -NA - - TOTAL OTHER OPERATING REVENUE Developer and Connection Fees - -NA MARGIN - -NA TOTAL REVENUE REQUIREMENT 96,429 96,429 page 2 of 2 Exhibit 3-E Elk River Municipal Utilities 2019 Test Year Allocation Factors Commercial/ TotalResidentialIndustrial Demand Allocation Factors Peak Day - 1000 gallons 4,426 2,380 2,046 Peak Day 100.0%53.8%46.2% Commodity Allocation Factors Commodity Sales - 1000 gallons 658,636 314,812 343,824 Commodity100.0%47.8%52.2% Customers Number of Customers 5,256 4,647 609 C100.0%88.4%11.6% Customer Facilities Allocation Factor Customer Facilities Weight16 Weighted Number of Cust 8,301 4,647 3,654 CF100.0%56.0%44.0% Customer Service Allocation Factor Customer Service Weight13 Weighted Number of Cust 6,474 4,647 1,827 CS100.0%71.8%28.2% Revenue Allocator Sum Other Rev Reqs$ 2,248,677 $ 1,213,327$ 1,035,350 R100.0%54.0%46.0% page 1 of 1 Exhibit 3-F Elk River Municipal Utilities 2019 Test Year Allocation of Revenue Requirements Commercial/Allocation TotalResidentialIndustrialFactor Plant Demand 755,185 406,119 349,065Peak Day Commodity 367,175 175,501 191,674Commodity Total Plant$ 1,122,360$ 581,620$ 540,740 Distribution Distribution Demand 637,724 342,952 294,772Peak Day Customer Facilities 392,164 219,538 172,626CF Total Distribution$ 1,029,888$ 562,490$ 467,398 Customer Customer Service 96,429 69,216 27,213CS Total Customer Service$ 96,429$ 69,216$ 27,213 Revenue Component Other Revenue (355,505) (191,821) (163,684) R Margin 343,997 185,612 158,385R Total Revenue$ (11,508)$ (6,209)$ (5,298) Total Revenue Requirements$ 2,237,169$ 1,207,117 $ 1,030,052 Total Revenues$ 2,237,169$ 1,232,230 $ 1,004,939 Percent Revenue Requirements100.0%54.0%46.0% Percent Revenues100.0%55.1%44.9% Percent Change0.0%-2.0%2.5% Revenue Req/1000 gallons3.3973.8342.996 Revenue/1000 gallons3.3973.9142.923 page 1 of 1 Section 4 Proposed Rates Changes to rates are generally based on the overall need for revenues and results of the cost-of-service analyses. The projected operating results at existing rates as presented in Section 2 of this report outline the overall revenue needs of the water utility. Section 3 summarizes the cost-of-service results. ERMU recently raised retail water rates effective in 2020. In Section 2 of this report, Table 2-2 shows that the annual change in net position for the water utility ranges from minus 11.6% to minus 36.8% of revenues during the Study Period. Despite the annual operating results, Table 2-3 shows that the estimated cash reserves fall from $7.7 million to $3.9 million, but the reserve levels remain well above the ERMU goal for minimum reserves. The cost-of-service results summarized in Section 3 of this report do not indicate that any changes to rates are necessary to address class cost issues. The cost-of-service results are within a reasonable range relative to comparison of revenues and allocated costs by class. Ultimately, the level of capital improvements and debt will have an impact on resulting levels of reserves. ERMU should monitor operating results and reserves on an on-going basis to determine when additional water revenues through a general rate increase are warranted. - 14 - City of Elk River, MN 11/1/2021 1 Sewer Revenue Adequacy City of Elk River November 1, 2021 Findings and Recommendations 2 •Propose Near-Term Approach to Sewer Rate Plan •Propose Capital Reserve Funding Approach •Regional Rate Comparison Study Objective: Develop Five-Year Financial Plan Financial Planning Framework •City can update budget and revenue data annually to stay on track 1 2 City of Elk River, MN 11/1/2021 2 3 Define Near-Term Revenue Requirements Revenue Requirements Operation and Maintenance Expense (O&M) Debt Service Reserves = + + Rate-Funded Capital + Capital-Related O&M-Related 4 Projected Sewer Utility Revenue Requirements •Rate-Funded CIP placeholders included in 2023-2026 •Capital is the Primary Driver of the Need for Rate Increases $0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 $4,500,000 2021 2022 2023 2024 2025 2026 O&M Rate Funded Capital Debt Service P&I Trend - O&M-Related Trend - Capital-Related Full Cost Recovery - Funding Depreciation 3 4 City of Elk River, MN 11/1/2021 3 5 Industry Objective: Full Cost Pricing •Funding Depreciation •Reserves are an important component of full-cost pricing 6 Capital Reserve Funding Strategies Minimum Recommended Approach 0.00 10.00 20.00 30.00 0 25 50 75 100 125 150 Projected System Annual Renewal Cost (2016 $M) Year Item Desc Est. Cost ($)Cost Year Funding Recurring Time Period Indexed (Future) Cost Annual Cost 2022 Lift Station Rehab $60,000 2022 Reserves/ Cash Every X Years $XX,XXX $Future Cost/Years 5 6 City of Elk River, MN 11/1/2021 4 7 Capital Reserve Funding Strategies •Based on Existing System Value and Depreciation •Net System Value ~ $30,790,000 •Annual Depreciation ~ $1,656,000 •Factors in New Capital from CIP •50-Year life assumed 8 Baseline Revenue Adequacy -$2,000,000 -$1,000,000 $0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 2021 2022 2023 2024 2025 2026 Total Revenues vs. Total Expenses Total Revenues Total Revenue Requirements Projected Revenue Surplus/(Deficiency) 2022 2023 2024 2025 2026 Budgeted Contribution to Capital Reserves $581,989 $759,398 $749,675 $729,661 $714,346 Actual Contribution to Reserves ($106,198)$110,017 $77,504 $33,328 ($7,467) 7 8 City of Elk River, MN 11/1/2021 5 9 Sewer Utility Projected Rate Adjustments Scenario 1: Five-Year Plan Projected 2022 Projected 2023 Projected 2024 Projected 2025 Projected 2026 Fixed Monthly Charge Domestic Users: % Change +5.0%+5.0%+5.0%+5.0%+5.0% Domestic Users: $ Change/month +$0.59 +$0.62 +$0.65 +$0.68 +$0.72 Volumetric Charge/thousand gallons Domestic Users: % Change +5.0%+5.0%+5.0%+5.0%+5.0% Domestic Users: $ Change/thousand gallons +$0.26 +$0.27 $0.28 +$0.30 +$0.31 Leachate: % Change +3.0%+3.0%+3.0%+3.0%+3.0% Leachate: $ Change/thousand gallons +$0.40 +$0.41 +$0.43 +$0.44 +$0.45 10 Scenario 1: Projected Revenue Adequacy 2022 2023 2024 2025 2026 Budgeted Contribution to Capital Reserves $581,989 $759,398 $749,675 $729,661 $714,346 Actual Contribution to Reserves $19,529 $369,931 $480,448 $591,590 $716,156 -$1,000,000 $0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 2021 2022 2023 2024 2025 2026 Total Revenues vs. Total Expenses Total Revenues Total Revenue Requirements Projected Revenue Surplus/(Deficiency) 9 10 City of Elk River, MN 11/1/2021 6 11 Scenario 1: Projected Revenue Adequacy $0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 $4,500,000 2021 2022 2023 2024 2025 2026 O&M Rate Funded Capital Debt Service P&I Contribution to Capital Reserves Trend - O&M-Related Trend - Capital-Related Full-Cost Recovery - Funding Depreciation •By 2026, additional $700,000 built into rates for on-going renewal/replacement 12 Scenario 1: Cash Balance Projections 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000 $9,000,000 $10,000,000 2021 2022 2023 2024 2025 2026 Projected Sewer Fund Balances Debt Service Reserve O&M Reserve Account Renewal & Replacement Capital Reserve O&M Reserve Account Target Debt Service Reserve Target Aggregate Revenue Increase •Positioned to strategically spend reserves on capital •Full-cost rates are critical to maintaining current position 11 12 City of Elk River, MN 11/1/2021 7 13 Sewer Utility Projected Rate Adjustments Scenario 2 with Indexed Depreciation: 10-Year Plan Projected 2022 Projected 2023 Projected 2024 Projected 2025 Projected 2026 Fixed Monthly Charge Domestic Users: % Change +4.5%+4.5%+4.5%+4.5%+4.5% Domestic Users: $ Change/month +$0.52 +$0.55 +$0.57 +$0.60 +$0.62 Volumetric Charge/thousand gallons Domestic Users: % Change +4.5%+4.5%+4.5%+4.5%+4.5% Domestic Users: $ Change/thousand gallons +$0.23 +$0.24 +$0.25 +$0.26 +$0.27 Leachate: % Change +3.0%+3.0%+3.0%+3.0%+3.0% Leachate: $ Change/thousand gallons +$0.40 +$0.41 +$0.43 +$0.44 +$0.45 14 Scenario 2: Projected Revenue Adequacy 2022 2023 2024 2025 2026 Budgeted Contribution to Capital Reserves $664,992 $912,193 $956,959 $993,123 $1,035,727 Actual Contribution to Reserves $5,449 $341,408 $436,436 $528,398 $631,916 -$1,000,000 $0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 2021 2022 2023 2024 2025 2026 Total Revenues vs. Total Expenses Total Revenues Total Revenue Requirements Projected Revenue Surplus/(Deficiency) 13 14 City of Elk River, MN 11/1/2021 8 15 Scenario 2: Projected Revenue Adequacy •By 2026, additional $630,000 built into rates for on-going renewal/replacement $0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 $4,500,000 2021 2022 2023 2024 2025 2026 O&M Rate Funded Capital Debt Service P&I Contribution to Capital Reserves Trend - O&M-Related Trend - Capital-Related Full-Cost Recovery - Funding Depreciation 16 Scenario 2: Cash Balance Projections 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000 $9,000,000 $10,000,000 2021 2022 2023 2024 2025 2026 Projected Sewer Fund Balances Debt Service Reserve O&M Reserve Account Renewal & Replacement Capital Reserve O&M Reserve Account Target Debt Service Reserve Target Aggregate Revenue Increase •Positioned to strategically spend reserves on capital •Full-cost rates are critical to maintaining current position 15 16 City of Elk River, MN 11/1/2021 9 17 REGIONAL SEWER RATE COMPARISON Scenario 1: $31.98 Scenario 2: $31.80 18 REGIONAL SEWER ACCESS CHARGE COMPARISON $7,924 $7,250 $7,087 $5,545 $5,325 $5,243 $4,600 $4,423 $4,400 $4,284 $4,000 $3,294 $2,641 $2,485 $2,485 $2,485 $- $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 Otsego Zimmerman Buffalo Elk River Big Lake St. Michael Albertville Monticello Rogers St. Francis Becker Dayton Otsego Blaine Ramsey Andover 17 18 City of Elk River, MN 11/1/2021 10 19 Recommendations •Adopt rate adjustment of 4.5% or 5.0% for 2022 for Domestic users; adopt 3.0%increase to leachate charge in 2022 •Further develop Renewal & Replacement strategy for Sewer System assets •Adopt approach to rate plan that incorporates full cost pricing and eliminates revenue deficiency over an identified planning period •Evaluate financial position annually in conjunction with budget planning, adjust rate plan accordingly •Educate public about your goals and approach to financial sustainability 20 QUESTIONS? Miranda.Kleven@ae2s.com Thank You! 19 20 Sewer Revenue Findings and Recommendations November 1, 2021 City of Elk River Adequacy 2 on trackrevenue data annually to stay City can update budget and •Financial Planning Framework Year Financial PlanStudy Objective: Develop Five Regional Rate Comparison•Propose Capital Reserve Funding Approach•Term Approach to Sewer Rate Plan-Propose Near• 3-O&M-+Funded Capital-Rate++=Reserves Debt ServiceExpense (O&M)Operation and Maintenance Revenue Requirements Term Revenue RequirementsDefine Near 4 Capital is the Primary Driver of the Need for Rate Increases•2026-Funded CIP placeholders included in 2023-Rate•Projected Sewer Utility Revenue Requirements 5 cost pricing-Reserves are an important component of full•DepreciationFunding •Industry Objective: Full Cost Pricing 6 Cost/Years$Future Every X YearsCashReserves/2022RehabStation Lift 2022Annual Cost(Future) Cost Indexed Time PeriodRecurring FundingCost Year($)Est. Cost DescItemYear(2016 $M)Projected System Annual Renewal Cost 150125100755025030.0020.0010.000.00 ApproachRecommended Minimum Capital Reserve Funding Strategies 7 Year life assumed-50•Factors in New Capital from CIP•Annual Depreciation ~ $1,656,000•Net System Value ~ $30,790,000•Based on Existing System Value and Depreciation•Capital Reserve Funding Strategies 8($7,467)$110,017($106,198)Actual Contribution to Reserves $714,346$729,661$749,675$759,398$581,989Budgeted Contribution to Capital Reserves20262025202420232022 Projected Revenue Surplus/(Deficiency) Total Revenue RequirementsTotal Revenues Total Revenues vs. Total Expenses 202620252024202320222021$5,000,000$4,000,000$3,000,000$2,000,000$1,000,000$0-$1,000,000-$2,000,000 Baseline Revenue Adequacy 9 Leachate: $ Change/thousand gallons+3.0%+3.0%+3.0%+3.0%+3.0%Leachate: % Change$0.28Domestic Users: $ Change/thousand gallons+5.0%+5.0%+5.0%+5.0%+5.0%Domestic Users: % ChangegallonsVolumetric Charge/thousandDomestic Users: $ Change+5.0%+5.0%+5.0%+5.0%+5.0%Domestic Users: % ChangeFixed Monthly2026Projected 2025Projected 2024Projected 2023Projected 2022Projected Year Plan Scenario 1: FiveSewer Utility Projected Rate Adjustments 10$716,156$591,590$480,448$369,931$19,529 Actual Contribution to Reserves $714,346$729,661$749,675$759,398$581,989 Budgeted Contribution to Capital Reserves20262025202420232022 Scenario 1: Projected Revenue Adequacy 11 renewal/replacementgoing -By 2026, additional $700,000 built into rates for on•Scenario 1: Projected Revenue Adequacy 12 cost rates are critical to maintaining current position-Full•Positioned to strategically spend reserves on capital •Aggregate Revenue IncreaseDebt Service Reserve TargetO&M Reserve Account TargetRenewal & Replacement Capital ReserveO&M Reserve AccountDebt Service Reserve Projected Sewer Fund Balances 202620252024202320222021 $10,000,000 $9,000,000 $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $-10.0%9.0%8.0%7.0%6.0%5.0%4.0%3.0%2.0%1.0%0.0%Scenario 1: Cash Balance Projections 13+$0.45+$0.44+$0.43+$0.41+$0.40Leachate: $ Change/thousand gallons+3.0%+3.0%+3.0%+3.0%+3.0%Leachate: % Change+$0.27+$0.26+$0.25+$0.24+$0.23Domestic Users: $ Change/thousand gallons+4.5%+4.5%+4.5%+4. 5%+4.5%Domestic Users: % ChangeVolumetric Charge/thousand+$0.62+$0.60+$0.57+$0.55+$0.52/monthDomestic Users: $ Change+4.5%+4.5%+4.5%+4.5%+4.5%Domestic Users: % ChangeChargeFixed Monthly2026Projected 2025Projected 2024Projected 2023Projected 2022Projected Year Plan -Scenario 2 with Indexed Depreciation: 10Sewer Utility Projected Rate Adjustments 14$5,449Actual Contribution to Reserves $1,035,727Budgeted Contribution to Capital Reserves20262025202420232022 Scenario 2: Projected Revenue Adequacy 15 renewal/replacementgoing -By 2026, additional $630,000 built into rates for on•Scenario 2: Projected Revenue Adequacy 16 cost rates are critical to maintaining current position-Full•Positioned to strategically spend reserves on capital •Aggregate Revenue IncreaseDebt Service Reserve TargetO&M Reserve Account TargetRenewal & Replacement Capital ReserveO&M Reserve AccountDebt Service Reserve Projected Sewer Fund Balances 202620252024202320222021 $10,000,000 $9,000,000 $8,000,000 $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $-10.0%9.0%8.0%7.0%6.0%5.0%4.0%3.0%2.0%1.0%0.0%Scenario 2: Cash Balance Projections 17 Scenario 2: $31.80Scenario 1: $31.98 REGIONAL SEWER RATE COMPARISON 18 AndoverRamseyBlaineOtsegoDaytonBeckerSt. FrancisRogersMonticelloAlbertvilleSt. MichaelElk RiverBuffaloZimmermanOtsego $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $-$2,485 $2,485 $2,485 $2,641 $3,294 $4,000 $4,284 $4,400 $4,423 $4,600 $5,243 $5,325 $5,545 $7,087 $7,250 $7,924 REGIONAL SEWER ACCESS CHARGE COMPARISON 19 sustainabilityabout your goals and approach to financial Educate public•budget planning, adjust rate plan accordingly in conjunction with Evaluate financial position annually •planning periodover an identified pricing and eliminates revenue deficiency incorporates full cost Adopt approach to rate plan that •System assetsfor Sewer Renewal & Replacement strategy Further develop •2022increase to leachate charge in 3.0%Domestic users; adopt for 2022 for 4.5% or 5.0% Adopt rate adjustment of •Recommendations 20 Thank You!@ae2s.comMiranda.Kleven QUESTIONS? 21$3,384,406$3,186,962$2,999,974$2,825,679$2,660,629$2,504,434 Total User Revenue$2,350,906$2,215,663$2,086,767$1,967,245$1,853,752$1,745,995 Volumetric Revenue$1,033,501$971,299$913,207$858,434$806, 877$758,439 Fixed RevenueProjected Revenue $15.53$15.08$14.64$14.21$13.80$13.40$6.49$6.18$5.88$5.60$5.33$5.07Volumetric Charge/thousand$15.01$14.29$13.61$12.96$12.34$11.75ChargeFixed Monthly2026Projected 2025Projected 2024Projected 2023Projected 2022Projected 2021 Scenario 1: Rate Projections and Revenue 22$3,300,166$3,123,770$2,955,961$2,797,155$2,646,550$2,504,434 Total User Revenue$2,294,207$2,172,862$2,057,516$1,947,995$1,844,250$1,745,995 Volumetric Revenue$1,005,959 Fixed RevenueProjected Revenue $15.53$15.08$14.64$14.22$13.80$13.40$6.31$6.04$5.78$5.53$5.30$5.07 Volumetric Charge/thousand$14.61$13.99$13.39$12.82$12.27$11.75 ChargeFixed Monthly Projected 2026Projected 2025Projected 2024Projected 2023Projected 20222021 Scenario 2: Rate Projections and Revenue