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

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

Water and Sewer Enterprise System 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 Business Plan

Water and Sewer Enterprise System  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? Policy leadership decisions

Water and Sewer Enterprise System  Lenders contractual requirements  Financial structure and performance  Credit quality standards - cost of borrowing  Washington and Raleigh laws and regulations and BOCC policies Factors influencing policy decisions

Water and Sewer Enterprise System Contractual Requirements

Water and Sewer Enterprise System  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 Revenue Bonds

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

Water and Sewer Enterprise System Revenue Bonds - Rate Covenant Revenues + 20% Working Capital Operations & Maintenance + P&I + 20% >= A B C Sales Capacity Fees Working Capital (20%) O&M Debt Service %

Water and Sewer Enterprise System  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 Revenue Bonds - Additional Bonds Test

Water and Sewer Enterprise System  political subdivision or public agency  portions of the system - no longer necessary, useful or profitable  Extension and Replacement Fund Revenue Bonds - Sale of the System

Water and Sewer Enterprise System  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 Revenue Bonds - Monitoring and Financial Budget Report Audit Report Engineering Reports

Water and Sewer Enterprise System Credit Quality Standards

Water and Sewer Enterprise System 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

Water and Sewer Enterprise System  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 Credit Quality Standards

Water and Sewer Enterprise System Laws, Regulations and Policies

Water and Sewer Enterprise System  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 Laws and Regulations NC General Statutes - Rates and Charges - Capacity Fees

Water and Sewer Enterprise System BOCC Policies PW Rules and Regulations  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

Water and Sewer Enterprise System Financial Performance

Water and Sewer Enterprise System Capital Improvement Plan Summary ( : $181mm)

Water and Sewer Enterprise System 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)

Water and Sewer Enterprise System Financial Forecast

Water and Sewer Enterprise System 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.

Water and Sewer Enterprise System Debt Service Coverage BOCC Standard All Debt 1X; Credit Requirements – Senior 2.1 to 2.5X

Water and Sewer Enterprise System Working Capital Requirements BOCC Standard 365 days; NC systems days (Source: LGC)

Water and Sewer Enterprise System  policy leadership decision making  relevant and valid information  deliberate  considerations Summary

Water and Sewer Enterprise System  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 Next Steps ….. Policy leadership decisions

Water and Sewer Enterprise System  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 Additional policy leadership decisions