4.1. ERMUSR 03-09-2010ver
MEMORANDUM
TO: Utilities Commission
FROM: Tim Simon, Finance Director
DATE: February 28, 2010
SUBJECT: Review of Water utility rates/cash flow projections
As requested, Dave Berg and I have reviewed the water utility rates for the next several
years. I will be presenting the cash flow analysis detail at your meeting on March 9`'', 2010.
The model developed is very interactive and various assumptions can be discussed.
Goals:
1. Determine if rates are sufficient for the ongoing operations and capital
improvements (2010-2020).
2. The cash balance is sufficient to cover 100% of next year's principal and interest and
6 months of operating expenditures.
Assumptions
Growth Residential -15 units (2011-2012), 25 units (2013-2015), 65 units (2016-
2017), 75 units (2018-2020).
Commercial - 13 units every other year, (building the size of the new
Metal Craft buildin
Capital Over the next 10 years, the Utility expects to make an average of $500,000
Improvements of capital improvements per year (in today's dollars). The improvements
include well rehab and reconstruction, painting/sandblasting towers, water
main repair and construction as well as meters.
Costs are inflated 4% annuall startin in 2011.
Water Usage Dave Berg and I built the model based on 2009 usage which is a rather
conservative usage year. We did a sensitivity analysis and if we pumped a
very dry year like 2006, the annual usage revenue could be down as much
as $160,000.
Operating Operating expenditures increase 3% annually.
Expenditures
Additional staffing in 2012 (1 position) and 2018 (1 position).
Target Cash Across enterprise funds the amount used as a target cash reserve amount
Reserve at year-end differs slightly. A standard target is next Year's principal and
interest and six monthly operating expenditures which does not include
de reciation which is a non-cash item.
Water Fees
There are two components to the Utilities water fee:
Meter Charges are fixed monthly fee based on the size of meter in the home or business. A
typical residential home would have a 5/8" meter and a commercial business would have a
1.5" meter. The meter charge is typically established to recover fixed administrative and
general expenses, which are fixed regardless of the amount of water used.
Usage Fees are based on the metered use of water. The Utility currently has a tiered system
to promote conservation of water resources.
Proposed rate changes
We are recommending no increase in the monthly meter charges for 2010 through 2013.
Beginning in 2014, we are recommending a 3% annual increase to the meter charge to keep
pace with increases in administrative costs.
The proposed rate increase to the usage fee for 2010 is 3% for residential/commercial users
for all the Tiers.
Av "~ a M~ntl! :Bill 2009 2414 3°lo ncreaee
Average user $15.00 $15.23
5,000 ons er month
Commercial user $374.17 $385.04
av . to ten
Connection fees
Connection fees are paid at the time a builder or homeowner pulls a building permit. The
Commission previously discussed a $500 increase for 2010 and 2011. Going forward I am
modeling a 2% yearly increase, which we will have to review yearly.
Cash balances
Cash balances are very important to accommodate fluctuations in revenues (weather related)
and to fund capital improvements. I have established a target cash reserve amount as
including 6 months operating expenditures and next year's principle and interest payments.
This is consistent with how other enterprise funds view the cash balances/reserves. I will go
into much more detail about this chart and the complete financial model developed at the
meeting.
City of Elk River ~
i
Water Fund Operating Cash Reserves
5, 000, 000 4%
4, 500, 000
4, 000, 000 -
3, 500, 000 3%
3, 000, 000 3 ~;
2,500,000 - ~ s ~ 2%
. 3
2,000,000 -~ ` `- x e ;~
i
1, 500, 000 .: ~ ~ ~ r :l
.,
:~' ~~ 1
1,000,000 - -
500,000
0 0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Target cash reserve amount ®Actual cash amount Annual Rate Increase
Next steps
Up date model with 2009 audited numbers and 2011 budget when completed.