1. AMCTO Conference Water Financial Plan Benchmarking and Performance Indicators Watson & Associates Economists Ltd Andrew Grunda, CMA, MBA Dan Wilson, BBA, CA June 19, 2012

2. Agenda 1. Overview of Financial Plan Requirements 2. Financial Plan Survey Results: Benchmarking & Performance Indicators Trends in Financial Performance 3. Overall Observations & Conclusions 2

3. Legislation for Water and Wastewater Services Since Walkerton, new legislation has been passed by the Province to enhance the provision of services. These include:  Safe Drinking Water Act  Sustainable Water and Sewage Systems Act  O.Reg. 453/07 - Safe Drinking Water Act  Clean Water Act  Water Opportunities Act 3

4. Requirements for Municipal Drinking Water Licence 1. Drinking Water Works Permit (DWWP) 2. Accepted Operational Plan, based on the Drinking Water Quality Management Standard (DWQMS) 3. Accreditation of the Operating Authority 4. Financial Plan 5. Permit to Take Water (PTTW) 4

5. Timing for Submitting Initial Financial Plans  O. Reg 453/07 provides that the financial plans must be submitted by July 1, 2010 or six months after granting of a municipality’s licence to operate their system(s), whichever is later  O. Reg 188/07 established the time frame for municipalities to apply for their licence to operate their systems  299 municipalities – on average, 17 municipalities per month to apply for their licence – staging was the largest municipalities first and then from South-west to South- east then North  Licences have been issued for all municipalities 5

6. Timing for Filing Financial Plan Report 6

7. 7 Summary of O. Reg. 453/07 Requirements  The financial plans shall be for a period of a least six years but longer planning horizons are encouraged  As the regulation is under the Safe Drinking Water Act, the preparation of the plan is mandatory for water and encouraged for wastewater  The plan is considered a living document but will need to be undertaken at a minimum every five years  The financial plans must be made available upon request to the public (without charge) and on the municipality's web site. The availability of this information must also be advertised

8. 8 Summary of O. Reg. 453/07 Requirements FINANCIAL PLAN CONTENTS  Projected Financial Position: Financial assets, liabilities, net financial assets/(debt), non-financial assets, changes in TCAs  Projected Financial Operations: Revenues, expenses, surplus/(deficit), accumulated surplus/(deficit)  Projected Cash Flow: Operating transactions, capital transactions, investing transactions, financing transactions, changes in cash  Information regarding the replacement of lead service pipes.

9. Rate Study vs. O.Reg 453/07 Reporting Format Significant Revision Areas Rate StudyO.Reg 453/07 Financial Plan Approach“Modified Cash Basis”“Full Accrual Basis” Capital RequirementsCapital ForecastTangible Capital Assets Previously acquired assets Lifecycle Cost Analysis (Future Replacement) Tangible Capital Assets (Historical Cost) Debt PaymentsPrincipal & Interest Expense Interest Expense Principal: Debt reduction AmortizationNot ApplicableIncluded in Operating Expenses Reserve TransfersIncluded as an expensePart of “Accumulated Surplus” Development Charge Reserve Fund Balances Reserve Fund Continuity Schedule Deferred Revenue 9

10. 10

11. Performance Indicator Survey Results (Averages) 11

12. Performance Indicator Survey Results (Averages) 12

13. Performance Indicator Survey Results (Averages) 13

14. Performance Indicator Survey Results (Averages) 14

15. Measures of Financial Position Performance Areas of Focus 1. Net Financial Assets/(Debt) 2. Tangible Capital Assets Historical Cost Net Book Value 3. Accumulated Surplus/(Deficit) 15

16. Change in Net Financial Assets/(Debt) Areas of Focus 1. Annual Surplus/(Deficit) 2. Acquisition of TCAs 3. Amortization 4. Change in Net Financial Assets/(Debt) 16

17. Financial Position Performance 17

18. Financial Position Performance 18

19. 19 Net Financial Assets/(Debt)

20. 20 Net Financial Assets/(Debt)

21. 21 Net Financial Assets/(Debt)

22. 22 Net Financial Assets/(Debt)

23. Financial Position Performance 23

24. Financial Position Performance 24

25. Financial Position Performance 25

26. Financial Position Performance 26

27. Financial Position Performance 27

28. Financial Position Performance 28

29. Trends in Financial Position Performance  Net Financial Assets/(Debt): 57% of municipalities are currently in a net debt position (low cash balance, high debt balance) Generally improves over the forecast period 45% of municipalities in a net debt position at the end of the forecast period 29

30. Trends in Net Financial Assets/(Debt) Changes  Components: Annual Surplus gradually improving TCA amortization increasing as assets are purchased and/or constructed TCA acquisitions per year “leveling off” in latter years of the forecast period  Higher capital demand in the early years of the forecast  Potential “unknown” capital needs in latter portion of the forecast 30

31. Trends in Financial Position Performance  Tangible Capital Assets: Both historical cost and net book value generally increase over the forecast period A lower increase in net book value implies amortization and disposals are at similar values to TCA additions  Accumulated Surplus: Increases reflected in both TCA additions and annual surpluses Decreases reflected in new debt obligations Increases in Accumulated Surplus occurred over the forecast period in all 69 municipalities 31

32. Measures of Operational Performance Areas of Focus 1. Revenue Rate Based Revenue Total Revenue 2. Expenses Operating Expenses Amortization Total Expenses 3. Annual Surplus/(Deficit) 32

33. 33 Operational Performance

34. 34 Operational Performance

35. 35

36. Trends in Operational Performance  Total Revenue: Rate based revenue as a % of total revenue increases throughout the forecast period Other revenue areas (i.e. Grants & Government funding, DCs Earned, Other) decrease throughout the forecast period, partially due to the uncertainty of revenue sources Building rates to sustainable levels  Rate based revenue increases at 5.9% per year on average  Other revenue decreases by 1.9% per year on average  Total Revenue increase at 3.5% per year on average 36

37. Trends in Operational Performance  Total Expenses: Significant increases in planned capital purchases and construction leading to increases in interest expense and amortization expense Decrease in other operating expenses proportion of total expenses  Represents items such as maintenance, utilities, salaries, etc.  Generally increasing at inflation and incremental changes due to new capital infrastructure  Significant increases in interest and amortization causing these operating expenses to decrease proportionately 37

38. Trends in Operational Performance  Annual Surplus/(Deficit): 23% of municipalities currently operating in deficit positions, attributable to including amortization as an operating expense Annual improvement is witnessed in the surplus/(deficit) position over the forecast period 7% of municipalities are in a deficit position at the end of the forecast period Municipalities generally showing surpluses in the latter years of the forecast  Used for building reserve fund balances for future asset replacements  Moving towards sustainable positions 38

39. Cash Flow Performance Areas of Focus 1. Change in Cash from: Operations Capital Investing Financing 2. Overall Change in Cash 3. Cash Balance 39

40. 40 Cash Flow Performance

41. 41 Cash Flow Performance

42. 42 Cash Flow Performance

43. 43 Cash Flow Performance

44. Trends in Cash Flow Performance  Cash generated from operating activities increases throughout the forecast period as water rates increase at rates higher than operating inflation  Cash used in capital activities decreases throughout the forecast Due to leveling off of TCA acquisitions  Cash generated from investing activities is minor and has little impact on cash balances 44

45. Trends in Cash Flow Performance  Cash applied to financing activities trends towards positive cash inflows in early years (i.e. debt proceeds to fund capital) but becomes negative in latter years (as debt payments are made)  Overall trend for cash shows increasing balances over the forecast period. This indicates that municipalities are buildings reserve fund balances for future asset replacements 45

46. Conclusions  While the ability to determine when a sustainable position is reached is difficult to determine using full accrual reporting, general trends indicate municipalities are moving towards sustainable positions  Analysis of the Water Financial Plans identify the gradual improvement of municipal financial position, operating position and cash flow positions throughout the respective forecast periods 46

47. Conclusions  Full Accrual water systems reporting required under O.Reg 453/07 provides municipalities with useful information in evaluating progress towards sustainability and related progress to other municipalities  These reports in conjunction with cash based forecasts used for rate setting provide an indication of a municipality’s sustainable position and the required investments from ratepayers/ stakeholders 47

48. Questions/Comments? 48