Dawn Lund Vice-President Utility Financial Solutions 1

2 Services UFS Providing to Danville  Cost of Service, Financial Projection and Rate Design for: ◦ Electric ◦ Water ◦ Wastewater ◦ Telecommunications ◦ Gas These are Enterprise Funds: Self sustaining operation = Revenues should meet financial requirements, including reinvestment for reliability

3 Utility Financial Solutions, LLC Utility Financial Solutions, LLC  International consulting firm providing financial services to utilities across the country  Here to present the financial overview of each utility to help aid in budget preparation  Get Direction from the Council on rate recommendations  Complete COS results and Rate Design will be presented early next year. Date upon request.

4 Overview of Financial Planning, Cost of Service and the Rate Setting Process

 Gives an overview of were the utility is today compared to key financial targets  Outlines a rate track needed to keep (or get) the utility financially healthy  Key targets include ◦ Operating Income ◦ Minimum Cash Reserve ◦ Debt Coverage Ratio 5

 Adequate rate of return on investment to help ensure current customers are paying their fair share of the use of the infrastructure and not deferring the charge to future generations ◦ Fund Depreciation Expense ◦ Fund Interest Expense ◦ Fund inflationary increase on historical investment of system 6

 Minimum cash reserve recommendation is MINIMUM – Considered cash critical  Funds exist to: ◦ Pay expenses ◦ Normal capital improvements (approx depr) ◦ Pay Debt Service ◦ Support and unexpected expense ◦ Keep utility healthy for future management and operations 7

Debt coverage ratios mandated by covenants and established in bond ordinances when debt issued Identifies cash generated by operations above the debt service payment Know your requirements and meet them 8

 Small periodic increases ◦ Keep up with inflation ◦ Avoid large/double digit increases in the future  Financial projection should be updated with budget process to monitor targets and rate track  Cost of Service Study every 3 years – know your costs and structure 9

10 Why is Cost of Service Important?  Cost of service is: ◦ A method to equitably allocate the revenue requirements of the utility among the various customer classes of service ◦ What revenues should I recoup from whom and how should I do it?

 Ensure rates recover costs to provide service to customers ◦ Including depreciation and rate of return  Defines Optimal rate structure ◦ Customer Charge ◦ Commodity Charge ◦ Demand Charge (electric) ◦ PCA/PGA  Reduce cross -subsidization between classes

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 The Telecommunications Department is currently meeting financial targets over the projection period  No revenue changes are recommended at this time  The projection will need to be updated yearly during the budget process as revenues, expenses and capital investment can change the financial projection 15

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17 The PGA will continue to adjust with purchased gas cost

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22 The table above is NOT the recommended rate design and used in the rate design process to work toward COS rates overtime, lessening the rate impact to customers

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26 The table above is NOT the recommended rate design and used in the rate design process to work toward COS rates overtime, lessening the rate impact to customers

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 UFS is looking for direction to prepare the rate design  What percentages are approved in each utility  A 2% bandwidth where appropriate on rate design  Move customer charges with rate designs  Onsite visit early next year to present rate design? 33

Dawn Lund Vice-President Utility Financial Solutions