TOWN OF INNISFIL STAFF REPORT

Transcription

1 TOWN OF INNISFIL STAFF REPORT STAFF REPORT NO: DSR DATE: 06 May 2015 TO: Mayor, Deputy Mayor and Members of Council FROM: Andy Campbell, Deputy CAO / Town Engineer SUBJECT: Municipal Services Corporation Business Case RECOMMENDATION: That Council receive the business case for the creation of two Municipal Services Corporations (MSC s) the first for the purpose of creating a water and wastewater utility; the second being a holding company as outlined in Staff Report DSR dated May 6, 2015; That staff undertake public and stakeholder consultation on the business case and the proposed model as required by Ontario Regulation 599/06 on May 21, 2015 and report back to Council in June 2015; and That Council direct staff to prepare for Council s consideration an implementation strategy for the proposed MSCs that includes financial and resource requirements when the results of the consultation exercise are reported back to Council. BACKGROUND: On February 18, 2015 Council brought forward motion CR directing staff to update Council on how to implement water and wastewater servicing for Innisfil Heights as identified in the Community Strategic Plan, Inspiring Innisfil Staff brought forward the requested update on March 18, 2015 in DSR The adopted resolution of that report directed staff to prepare a business case for a Municipal Services Corporation for the Town s water and wastewater services and capital infrastructure program (CR ). /

2 Staff Report DSR May 6, 2015 Municipal Services Corporation Business Case Page 2 of 3 ANALYSIS/CONSIDERATION: The creation of a Municipal Services Corporation (MSC) is governed under the Municipal Act, 2001 Reg. 599/06 and the Canada Business Corporations Act, This Regulation defines the municipal powers, duties and limitations for both the MSC and the municipality. Specifically O. Reg. 599/06 requires: A municipality shall adopt a business case study before it uses the powers to establish a corporation either alone or with one or more other public sector entities (s. 6a) Before establishing a corporation a municipality shall consult with the public about the proposal to establish the corporation (s. 8) The Town in concert with Innisfil Energy Services company retained PricewaterhouseCoopers LLP (PwC) to evaluate the Town s situation, assess the options considered and prepare a business case for the creation of a MSC for the Town s water and wastewater services. Based upon the work of PwC, they are recommending the adoption of a utility model under the operation of a MSC to meet the strategic needs of the community as identified in Inspiring Innisfil 2020 to unlock economic growth though infrastructure investment. The key elements of the business case (see Attachment 1) are: The Town s strategic outlook The financial challenges Current DFA Rate Studies Legal considerations by Aird & Berlis LLP The function and considerations of the utility model Implementation considerations Recommendations PwC s conclusions are: Significant investment in water and wastewater infrastructure is, according to Town documentation, required to realize the potential in the employment lands (Innisfil Heights) The current funding model does not enable the Town to achieve the required water and wastewater capital investments in the foreseeable future A utility financial model delivered through a Municipal Services Corporation offers the potential to enable the desired investment in water and wastewater assets without additional Town debt, while maintaining prospective rates at or below currently projected levels and enhancing the Town s development competitiveness Implementation of the utility financial model could be accomplished (according to advice from counsel) via the incorporation of a Municipal Services Corporation for water and wastewater Incorporate a holding company through the creation of a second Municipal Services Corporation to enable the Town to mitigate ratepayer costs through direction of utility dividends to meet (in part) utility required revenue

3 Staff Report DSR May 6, 2015 Municipal Services Corporation Business Case Page 3 of 3 The holding company, which the Town would own, would hold the shares for the water/wastewater utility MSC and potentially other Town assets such as InnPower, Innisfil Energy Services and other assets. It is recommended that the business case be shared with the community and that staff consult with the public and various stakeholders. A Public Open House is suggested for May 21, 2015 to solicit public reaction to the proposed business case. Additional stakeholder meetings will be coordinated over the course of the coming weeks. The business case outlines a number of implementation considerations for the establishment of the MSCs, as does O.Reg. 599/06 and the Ontario Business Corporations Act. An implementation strategy needs to consider the following at a minimum: Operation of the MSCs Human and financial resourcing Board structure Shareholder Declarations Asset transfer policies Form of the services agreement/by-law between the MSCs and Town Corporate structure Implementation schedule It is recommended that staff prepare an implementation strategy for consideration by Council in June 2015 that includes consideration of the public input received on the business case. OPTIONS/ALTERNATIVES: Council could direct staff to hold additional public consultation sessions on the business case. FINANCIAL CONSIDERATION: There are no direct financial considerations associated with the consideration of this report. CONCLUSION: A Municipal Services Corporation can be established to implement a utility financial model for water and wastewater services in conjunction with a second Municipal Services Corporation as a holding company. There is a requirement under the Provincial Regulation that a business case is prepared and that the municipality consult with the public about the proposal to establish the corporations. PREPARED BY: Andy Campbell, P.Eng. Deputy CAO/Town Engineer Attachment: Business Case Report dated April 29, 2015, prepared by PwC

4 Using the Municipal Services Corporation and Utility Models for Financing and Managing Water and Wastewater Delivery April 29, 2015 Business Case

5 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Contents Executive Summary 1 Introduction and the PwC Mandate Introduction The PwC Mandate The Purpose of This Document The Town s Strategic Outlook Town Boundary Changes Over Time The Role of the Employment Lands Water and Wastewater Investment Required The Financial Challenge Requirement for Funding Integrity Other Models Investigated Water and Wastewater Cash Flows Current Model The Key Challenge Need for Financing Investment How Large Is This Challenge? Is This Financing Feasible for the Strategic Program? The Solution Required The MSC Structure with the Utility Model The MSC Structure The Utility Model The Utility Model How the Utility Model Works Regulation Utility Model versus Current Model Economic Comparison - Assumptions Economic Comparison - Results Does the MSC Structure with the Utility Model Meet the Town s Needs? Implementation Considerations PwC

6 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case 6.1 The Municipal Services Companies Shares and Shareholding Governance Financing and Dividends Existing Debt and Reserves Governing By-Law Master Contract Town and Municipal Services Companies Employees and Business Services Responsibility and Liability Legislative and Regulatory Considerations Summary Implementation Considerations Summary and Recommendations Summary Recommendations Appendices A. Definitions B. Bibliography C. Technical Appendix: Adapting the Utility Model to Water and Wastewater D. Water Rate Study E. Wastewater Rate Study F. Aird & Berlis LLP Letter Municipal Services Corporation

7 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Executive Summary Introduction The ( Town ), in conjunction with Innisfil Energy Services ( IES ), is investigating the concept of adapting a Utility Model within a Municipal Services Corporation (as described in Sections 4 through 6 of this document) for use in funding the investment and managing the operations of the Town s water and wastewater services. During 2014 and 2015, the Town, along with its advisors, has undertaken explorations at the conceptual level concerning the applicability and potential adoption of a Utility Model within a Municipal Services Corporation structure for water and wastewater. On March 18, 2015 Council directed staff to: undertake a business case for a Municipal Services Corporation which would identify the optimal corporate framework for the management of the Town s capital infrastructure program (specifically Water and Wastewater Services). PricewaterhouseCoopers LLP ( PwC ) has been working with the Town and IES to advise and assist in the early concept development stage of the water and wastewater Utility Model within a Municipal Services Corporation. This business case document is a deliverable of this work. Summary of this Business Case To summarize the main points of this document: The Town faces pressing strategic challenges to its continued sustainability and future viability (Section 2); The Employment Lands are a critical component in the Town s strategy (Section 2); Significant investment in water and wastewater infrastructure is required in order to realize the potential benefits of the Employment Lands (Section 2); The current model (including the limitations of the Municipal Act) for funding water and wastewater assets and operations is not financially feasible to support the required water and wastewater investment (Section 3); An approach combining a Municipal Services Corporation structure and the Utility Model for financing has the potential to enable the required water and wastewater investment (Section 4); A Utility Model - already used for InnPower Corporation (formally, Innisfil Hydro) and other Ontario electrical utilities - offers the potential to enable the strategic investment in water and wastewater assets without additional Town debt, while maintaining prospective rates at or below currently projected levels and enhancing Town development competitiveness (Section 5); Implementation of the Municipal Services Corporation structure for water and wastewater would require addressing a number of important considerations; however, none of these appears at this writing to be insurmountable or to threaten the viability of the Municipal Services Corporation concept (Section 6); Town will continue to hold and be responsible for the applicable water and wastewater licenses. The liability of Council members defined in legislation will continue to apply; the oversight and reporting requirements of UCo to the Town (and Council) will be designed with this liability in mind (Section 6); and Implementation of a holding company through the creation of a second Municipal Services Corporation could enable the Town to mitigate ratepayer costs through direction of utility dividends to meet (in part) the utility required revenue, while avoiding attribution of Municipal Services Corporation debt to the Town. PwC i

8 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Recommendations The Town should: Strategically consider the adoption of the Municipal Services Corporation structure and the Utility Model for water and wastewater with a second Municipal Services Corporation as a holding company; Commence a community and stakeholder consultation program consistent with existing Town policy and Council direction PwC ii

9 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case 1 Introduction and the PwC Mandate 1.1 Introduction The Town is investigating the concept of adapting a Municipal Services Corporation ( MSC ) structure and the Utility Model for use in funding the investment in and managing the operations of the Town s water and wastewater services. During 2014 and 2015, the Town, along with its advisors, conducted explorations at the conceptual level concerning adoption of the MSC structure and Utility Model for water and wastewater. As at the time of this writing, no recommendation has been formally adopted by Council concerning this possibility. 1.2 The PwC Mandate PricewaterhouseCoopers LLP ( PwC ) has been working with the Town and IES to advise and assist in the early concept development stage of the water and wastewater Utility Model within the MSC structure. The scope of our advice and assistance is to: Assist in the concept development of the water and wastewater Utility Model within the MSC structure; Conduct targeted financial analyses of this model and comparisons to the existing the water and wastewater funding model used by the Town; Analyze the water and wastewater Utility Model within the MSC structure from the standpoints of: o The Town; o Town ratepayers; and o The development community; Conduct training for Council concerning the Utility Model within the MSC structure; and Prepare this Business Case document. In conducting our work, we have relied extensively on information provided to us by the Town or consultants to the Town, including those cited in Appendix B. In accordance with our mandate, we have not re-created any of the work of those consultants or otherwise verified the accuracy or completeness of their information. The results of our analysis are subject to the completeness and accuracy of this information, and are subject to revision should this information change. 1.3 The Purpose of This Document This Business Case document sets out PwC s analysis and conclusions concerning the potential adoption of the Utility Model within the MSC structure for the Town s water and wastewater services, in accordance with PwC s mandate and commensurate with the early concept stage of development. PwC 1

10 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case 2 The Town s Strategic Outlook This section describes the Town s historical strategic challenge with respect to the integrity of the Town boundaries, the role of the proposed Employment Lands (defined below) in securing the Town s future sustainability, and the investment in water and wastewater assets required in order for the Employment Lands to be developed. 2.1 Town Boundary Changes Over Time The Town is a lower tier municipality within the County of Simcoe and has jurisdiction and responsibility for the delivery of a wide range of services within a County governance structure. Two of the more significant local services which address the viability for long term growth are Water and Wastewater services. The ability to meet the challenges associated with growth have historically been a significant obstacle for the Town. Over time, a steady and daunting erosion of the physical boundaries of the Town have continued to shrink the municipality as the adjacent City of Barrie has annexed significant tracts of land, in large part through the support and authority of the Province of Ontario. As shown in the map below, the boundaries of the Town have moved over time as land areas were annexed by Barrie: Town staff has indicated that one of the primary reasons for this persistent loss of territory by the Town is that Barrie has continued to meet the growth pressures through long range infrastructure planning, while the Town has failed to develop a long term vision for its future. Much of that changed in 2011 with the adoption of the Town s PwC 2

11 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Community Strategic Plan called Inspiring Innisfil 2020, which laid the groundwork for much needed master infrastructure planning along with a forward looking economic development strategy. The ability to meet the growth demand particularly in the Highway 400 corridor has become a key component of the Town s long term viability. This Highway 400 corridor is known in the Town as the Employment Lands, because its intended use is industrial and commercial rather than residential. 2.2 The Role of the Employment Lands Servicing the Employment Lands is forecasted to act as a catalyst for employment in the Town. Currently, upwards of 80% of employed Town residents are forced to leave the Town on a daily basis for employment purposes. Successful development of the Employment Lands is intended to provide greater opportunity for both Innisfil residents as well as residents from around the County of Simcoe to find meaningful employment in the Town. Achieving this is an important part of the Town s approved Inspiring Innisfil 2020 Strategy (see overview diagram below). Servicing the Employment Lands will ensure the long term viability of the Town and allow the attainment of a complete community as well as the ability to expand the tax assessment base shifting the focus toward industrial/commercial taxation. In addition, it will assist the Town in supporting the directed growth by the Province as set out in the Places to Grow policy. PwC 3

12 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case As noted, successful development of the Employment Lands will support the Town s efforts to shift the assessment imbalance off of the residential and farm-based assessments and seek to capture a larger component of industrial/commercial assessment opportunities. This will increase Town tax revenues beyond those paid by residents and current businesses, enabling the Town to further enhance quality of life through provision of facilities and services while maintaining reasonable and affordable tax rates for all property owners. 2.3 Water and Wastewater Investment Required In order to service the Employment Lands with water and wastewater services, a significant investment in new infrastructure assets is required. In this report, this will be referred to as the Strategic Program. On a map, the physical investment looks like this: PwC 4

13 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case PwC 5

14 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case PwC 6

15 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Financially, the investment is very large. Over time, the Strategic Program will call for over $200 million in capital investment (net of external capital contributions). Strategic Program $120 Innisfil Heights trunk sanitary and water servicing Water and wastewater treatment plant upgrades $ $80 $ millions $60 $40 $20 $ $20 Source: PwC Water Wastewater This is a very significant undertaking for the Town. By way of reference, total tax revenue for 2014 was less than $35 million. The Town is contemplating adoption of the MSC structure and the Utility Model because, as described in Section 3, this type of Strategic Program is not financially feasible under the current Town (and general Ontario municipal) method of funding water and wastewater investments and services (details provided in Section 3 below). PwC 7

16 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case 3 The Financial Challenge This section describes the challenges the Town faces in meeting its strategic challenges with respect to the required water and wastewater investment. In this section, the magnitude of the funding challenge under the Current Model is outlined, and the limitations on the use of Town debt and developer advances to meet this funding challenge are described 3.1 Requirement for Funding Integrity Subsequent to the water and wastewater system failure in Walkerton Ontario in 2000, and the illness and loss of life caused by this failure, the Province enacted several pieces of legislation related to water and wastewater. One such piece, the Safe Drinking Water Act O.Reg. 453/o7 requires the owner to develop a financial plan to demonstrate that the drinking water system is financially viable. The Town has developed long-term rate studies, prepared by Hemson Consulting Ltd. and DFA Infrastructure International, which identified the water and wastewater rates required for full cost recovery. Council has adopted the rates as set out in these studies since Other Models Investigated In 2012 the Town undertook and explored the feasibility of a P3 project for $245.6 Million for a Design Build Finance Operate and Maintain Project. The P3 project was seen as a strong candidate for a P3 project however the challenge remained that there was no supported revenue stream that would ultimately support and finance the operation and maintenance of the system. What the Town learned from this exercise was that the scope of the project was simply too large for the Town to undertake with its own financial resources. The ability to finance such an undertaking even with a significant contribution (upwards of 25% grant by Senior Government) would not be attainable without other financing partners. The Town has an existing water supply Contract with the Town of Bradford West Gwillimbury and discussions regarding the P3 approach was initiated but it became clear that the debt limitations on the municipalities was a major stumbling block for such an approach. 3.3 Water and Wastewater Cash Flows Current Model Ontario municipalities currently employ a model for funding water and wastewater operations and assets described below ( Current Model ). This framework is compliant with legislation but is not mandated by Government. In other jurisdictions, other models are used including the Utility Model (see Section 4). Existing and Growth Assets The Current Model provides funding for: Annual operations and maintenance costs ( O&M ), periodic capital investments (such as equipment overhaul) required to keep the system functioning properly, and ultimately major capital investment to replace or otherwise renew the assets. Capital investment required with respect to existing assets will be referred to as renewal capital ; and Construction of entirely new assets (or expansion of, for example, the central processing plants) to accommodate growth in the system and therefore growth in the Town. This capital expenditure is referred to as growth capital. Once these new assets are in operation, they become part of the existing system and add to the existing system costs described above. In the Current Model, these are largely dealt with separately. PwC 8

17 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Payment for Existing Assets The following illustrative model demonstrates how the current model treats the recovery of the various aspects of the water and waste water systems. In the Current Model, the first cost to be recovered each year is Operating & Maintenance ( O&M ). This expense is generally consistent from one year to the next, and so does not pose a financing challenge as rate revenue funds costs as incurred. Required Revenue: Current Model Step 1 Current Model Operations & maintenance PwC Next, renewal capital must be funded. As these expenditures tend to fluctuate year to year high one year, low the next they are, under the Current Model, funded largely via reserve funds. Part of rate revenue goes into a reserve fund, and this fund is drawn down as needed to pay for renewal capital expenditures when these occur. PwC 9

18 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Required Revenue: Current Model Step 2 Current Model Operations & maintenance Renewal capital future provision Renewal capital current year PwC This model is common and can be effective but is not without its challenges: It is financially inefficient, as water and wastewater assets tend to be long-lived but expensive to renew. Therefore, funds must be collected from ratepayers many years in advance, and invested in safe/stable instruments or accounts which typically bear low interest. This low interest over a long period of time is inefficient from a financial standpoint; It suffers from a measure of unpredictability. Even the most skilled engineers cannot predict with certainty the cost or timing of renewal investments to be made decades in the future; It is inflexible. If funds in the reserve accounts are insufficient, then either required investments are deferred or the Town must borrow to make the investments. Repayment of the debt (with interest) would be accomplished only by an unforeseen increase in rates; and It is inherently unfair, as current ratepayers are required to pay into a fund to build assets that may not be built while they are consumers of the water and wastewater systems services. In any model, renewal asset investment must be funded; in the Current Model they are funded far in advance. In the Utility Model (as set out in Section 5), this investment is funded by ratepayers while the assets are in service. PwC 10

19 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Payment for Growth Assets When the Town expands, the water and wastewater system must expand with it (excluding areas providing their own service via private wells and septic systems). This calls for investment in growth water and wastewater assets. The Strategic Program is a program of growth asset investment. Growth assets can include: Expansion of central water and wastewater processing plant capacities, and other assets such as pumping stations; Addition of major linear assets (i.e. pipes in the ground) to connect new areas; and Local connections to new residential, commercial and industrial properties. How are these growth assets paid for? Municipalities in Ontario have the ability to collect Development Charges ( DCs ) from developers. These charges are intended to pay a portion of the municipal costs incurred to provide infrastructure services arising from growth of the municipality. DCs are governed by the Development Charges Act, which defines the maximum that may be charged (note that there is no minimum charge). DCs fund many different types of municipal services, including police, fire, parks, libraries, roads and the like; water and wastewater costs are (roughly speaking) half of the total costs met by DCs. The Town (similar to other municipalities throughout the Province) has adopted a policy of growth pays for growth. Town DCs are calculated so that the full cost of growth assets is recovered in DCs to the extent allowable under the Development Charges Act. This is accepted practice but is not mandatory, and not all municipalities do so. In some communities the philosophy of growth paying for growth has not been a guiding principal, especially as it relates to infrastructure to support employment opportunities. For example, the City of Barrie and the Town of Bradford West Gwillimbury ( BWG ), both adjacent municipalities to the Town, have provisions for reductions of or exemptions from DCs which are related to industrial development. Innisfil is investigating a Community Improvement Program (CIP) as a mechanism to rebate DCs as an economic development tool to attract new businesses and employment. PwC 11

20 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Required Revenue: Current Model Step 3 Current Model Operations & maintenance Renewal capital future provision Renewal capital current year Growth capital Less Development charges rec d PwC Overall Revenue Requirement Current Model Based on Town rate studies, the overall water and wastewater system projected revenue requirement (not including growth capital) is as follows: PwC 12

21 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Water and Wastewater Required Rate Revenue $25 $20 $ millions nominal $15 $10 $5 $ O&M Near term capital Life cycle capital Source: Town water and wastewater rate studies prepared by DFA Infrastructure International PwC The significant requirement for contributions to reserves for capital is clear. Near term capital is mainly renewal capital to be made in each year or within a few years; Lifecycle reserve is intended for assets to be replaced over a much longer period, e.g. 20+ years. The total capital expenditures (excluding the Strategic Program) and reserve contributions over the 17 years shown in the graph are projected to be over $140 million. By way of reference, the net book value of water and wastewater assets was $160 million as at December 31, 2014; replacement cost in the future will be much higher due to inflation. The significance of this substantial advance funding requirement of renewal investment in the Current Model will be highlighted in Section 5. The above values do not include growth capital or the effect of DCs (related to growth capital) collected in arrears. The chart below shows the projected balance of the DC Reserve Account and DC advances according to Town rate studies; negative balances would require Town borrowing or other financing source such as developer front end financing. PwC 13

22 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Combined DC Reserve Account Balance and Advances (20.0) (40.0) (60.0) $ millions (80.0) (100.0) (120.0) (140.0) (160.0) Source: Town water and wastewater rate studies prepared by DFA Infrastructure International PwC Combined DC account deficit/advances These negative balances give rise to interest costs, which are not included in the rate calculations. Interest costs have been calculated using a long-term interest rate of 5% (near the low end of interest rates on existing Town debt), applied to average annual balances. The total required revenue including these interest costs is as shown below: PwC 14

23 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Combined Revenue Requirement Current Model $ millions Required revenue before interest on DC Reserve Interest on DC Reserve and Advances Source: Town water and wastewater rate studies prepared by DFA Infrastructure International, PwC analysis PwC It is important to note that the required revenue above and the rates that result will not deliver the Strategic Program. The rate analysis assumes large-scale Town borrowing (to fund the DC Reserve Account balances); such negative balances could also be met by developer advances. Please refer to Section 3.6 for assessment of these funding options. Rate Setting Rates are set by allocating the total required revenue in each year, across all ratepayers in a manner determined by Council and with consideration of the DFA studies. Please refer to Appendices C, D, and E for additional information. 3.4 The Key Challenge Need for Financing Investment A significant challenge faced by the Town and other municipalities is that DCs are collected in arrears that is, the Town makes the growth capital investment first, then collects the associated DCs years afterwards. This gives rise to a need for financing of some kind, in order that the Town s cash requirements are met in each year. PwC 15

24 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Required Revenue: Current Model Step 4 Current Model Comments Operations & maintenance Renewal capital future provision Renewal capital current year Growth capital Less Development charges rec d Town debt or developer advances PwC Required to balance cash This required financing can be achieved in one or both of two means: The Town can borrow the funds; and/or The Town can require advances from developers. Further elaboration concerning these two options is provided in Section How Large Is This Challenge? For the Strategic Program, the financing gap is quite significant. As described above, according to Town rate studies, funding the DC Reserve Account negative balances requires financing of nearly $150 million. 3.6 Is This Financing Feasible for the Strategic Program? There are two means by which this financing gap may be met: Town borrowing; and/or Developer advances. PwC 16

25 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Town Borrowing Under the Municipal Act the Town is only allowed to borrow amounts with annual servicing costs up to 25% of its annual revenues. This presently caps the Town s statutory debt capacity at approximately $60 million whereas the debt requirements are nearly $150 million to implement the water and wastewater Strategic Program. In addition the capital program in the Town s Master Transportation Plan requires another $91 million in financing and additional funds are required for new fire stations and stormwater management. Clearly the Town cannot finance all of it growth and replacement infrastructure with its current financial limitations. While it is possible to apply to the Ontario Municipal Board for relief from the debt limitations, the outcome is uncertain and would most likely tie up debt capacity for other projects in the process. The way the debt limit is determined, the Town does not gain back significant borrowing capacity through annual repayments until the debt has been fully retired as the available capacity is based on the annual cost to service the debt (principal and interest), not the increased equity in the asset the debt was issued for. Therefore, debt incurred to implement even part of the Strategic Program would impair the Town s financial flexibility for an extended period. According to Town policy, the Town s maximum annual debt repayment limit (ARL) will not exceed 20% of the Town s own source revenues in order to maintain up to 5% flexibility to address emergency issues. Town policy also directs debt service on debt which is paid off, to reserve funds for renewal capital investment to address asset management plans and to close funding gaps that currently exist.. With respect to growth-related investment such as the Strategic Program, the Town has additional policy guidelines promoting financial prudence: Town debt related to growth investment may not be incurred unless eventual recovery (with interest) by DCs is indicated in the relevant studies; Such debt cannot have a term exceeding 10 years, which increases its debt service (interest plus principal) load - and use of the debt limit - compared to 20-year debt allowed by policy for other purposes; DCs collected in the initial 10-year period must be sufficient to pay for associated debt service over this 10- year period; and If all the above conditions cannot be met, the proposed projects must be deferred until the conditions can be met. Given all the above, available Town debt is strongly constrained. Developer Advances For smaller developments such as residential neighborhoods, the Town recently has required developers to advance the cost of growth investment being the engineered services for water, wastewater and roads. This may be via a cash advance (in which case the Town would expend the investment) or via developer construction of the assets generally linear assets servicing the neighborhood and conveyance of the assets to the Town. However, the Strategic Program calls for investment of over $200 million (net of external contributions) and DC recovery is over a much longer time frame. The Town has received interest from active developers (as opposed to land speculators) in the defined area of the Employment lands. However, Town engagement with these developers over the last several years indicates that developers are neither willing to make the up-front investment of the magnitude and duration required by the Strategic Program nor sterilize the significant amount of land required to install on-site servicing. Further the Province is currently consulting on changes to the Development Charges Act and one of the potential changes is that municipalities will not be permitted to collect any DCs prior to the issuance of a building permit. Although it is unknown if this provision will remain in the revised Act, this issue of prepayments is a major concern to the development industry. As a result, the Strategic program has not progressed, and there is no assurance that it will do so at any time. PwC 17

26 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Therefore, the financing challenge poses a strategic problem for the Town absent another solution, the Strategic Program cannot be financed and the Town will not achieve its employment goals. The desire to diversify the Town s assessment base is considered a critical component for the long term viability of the community. 3.7 The Solution Required What are the key requirements which any solution to this challenge must provide? Full cost recovery for water and wastewater services, as required by Safe Drinking Water Act O.Reg. 453/o7. Availability of investment capital when needed to move the Strategic Program forward. As described above, the dollar amounts are in the tens of millions; No requirement for Town borrowing for the Strategic Program, given the legislated limits; No requirement for developer advances, except for those local connections (which are outside the Strategic Program described above); No additional burden on ratepayers, compared with rate outlook per the Town s most recent study. DCs which are competitive with other municipalities with which the Town is in competition for development. The next section describes the MSC structure combined with the Utility Model, and how model may offer a solution to the Town s water and wastewater challenges. PwC 18

27 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case 4 The MSC Structure with the Utility Model The proposed solution to the Town s challenge is to combine: The MSC Structure; with The Utility Model of financing water and wastewater assets and operations. 4.1 The MSC Structure As described in Section 3, the central problem faced by the Town in implementing the Strategic Program is the need for Town borrowing to finance the collection of DCs in arrears. Town borrowing of the magnitude required is infeasible. The Town has received legal advice (see Appendix F) to the effect that given the constraints upon the Town for the purpose of borrowing sufficient funds to support the Strategic Program, it should give consideration to establishing a MSC that would then be able to finance the Strategic Program. If properly structured, the debt of the MSC would not be consolidated on the books of the Town (see Appendix C). This is analogous to the way that the debt of InnPower is treated. Preliminary analysis indicates that the MSC structure would include: A MSC for water and wastewater; and A MSC acting as a holding company for the utility company MSC and consideration (at Town discretion) to include other Town enterprises and holdings. Please refer to Appendix C. 4.2 The Utility Model Establishing a MSC for water and wastewater is, however, not sufficient. Such a MSC, if operated according to the Current Model set out in Section 3, would not be able to finance the Strategic Program. The financing to be raised by a MSC under the Current Model would be supported only by DCs to be collected in the future; no other source of cash flow would be available to support the financing. Future DCs to be collected are not suitable as a basis for financing: The timing of DC collection is highly uncertain; For the Strategic program, there is no identified developer or group of developers who would contract for payment the DCs; and Even if such developers were identified, and they were willing to contract for the payment of future DCs (which is very unlikely), this would not constitute a credit-worthy (see Appendix C) basis for financing. The Utility Model described in Section 5 (and, in more detail, Appendix C) provides a viable basis for financing in much the same way that InnPower is able to raise capital for its electrical distribution service using this model. In essence, financing is supported by a claim on the rate revenue paid by ratepayers. This has been shown in the market to be a viable basis for financing of infrastructure. The Utility Model would not address the Town s challenges absent the MSC structure, as the debt of the utility would accrue to the Town and result in violation of its debt limits. Section 5 below described the Utility Model (with additional detail provided in Appendix C). Section 6 describes some implementation considerations related to the establishment of the MSC. PwC 19

28 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case 5 The Utility Model This section describes an alternative model for funding water and wastewater assets and operations, i.e. the Utility Model. The Utility Model for water and wastewater is an adaptation of the long-established model already used for electrical utilities in Ontario and elsewhere, including InnPower. The Utility Model would be implemented within the MSC structure. 5.1 How the Utility Model Works The Utility Model is an alternative way of meeting the financial requirements of a public service. Like the Current Model, it enables full recovery of the cost of service for the public service in question including electricity as at present, or water and wastewater. The Utility Model is not currently in use for water and wastewater service delivery in Ontario but is used in other Canadian jurisdictions such as several in Alberta and British Columbia. As in the Current Model, the first component of required revenue is used to cover O&M expenses. Required Revenue: Utility Model Step 1 Current Model Utility Model Comments Operations & maintenance Renewal capital future provision Renewal capital current year Growth capital Less Development charges rec d Operations & maintenance Common to both models Town debt or developer advances PwC Required to balance cash When it comes to recovery of costs for capital investment, the Utility Model differs significantly from the Current Model. PwC 20

29 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Required Revenue: Utility Model Step 2 Current Model Utility Model Comments Operations & maintenance Renewal capital future provision Renewal capital current year Growth capital Less Development charges rec d Operations & maintenance Common to both models No provisions in utility model Renewal and growth capital to utility rate base, less amount recovered in DCs. Funded by utility debt and equity Town debt or developer advances PwC Required to balance cash The Utility Model does not require reserves, as assets are paid for (by ratepayers) only when they are in service and not in advance. Capital assets both renewal and growth become part of the rate base. When an investment in capital assets (renewal or growth) is required, the utility raises financing to meet the cash requirement for the investment. The financing is a combination of debt (like the mortgage on a house) and equity (like the down payment). The proportion of debt and equity is determined by a regulator, or by a contract to which the utility is subject; The value of the utility-financed asset is assigned to a utility account called rate base. The costs associated with rate base are recovered in rates in annual instalments. The first component recovered annually is depreciation. The assets in rate base have an assigned useful life, and each year a portion of the original cost is recovered in rate revenue. This depreciation is the recovery of financing principal, and reduces the rate base over time; PwC 21

30 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Required Revenue: Utility Model Step 3 Current Model Utility Model Comments Operations & maintenance Renewal capital future provision Renewal capital current year Growth capital Less Development charges rec d Operations & maintenance Depreciation Common to both models No provisions in utility model Renewal and growth capital to utility rate base, less amount recovered in DCs. Funded by utility debt and equity Depreciation recovers investment principal, and is for all capital assets that are in rate base. Depreciation reduces rate base Town debt or developer advances PwC Required to balance cash The other component of cost related to rate base is return on rate base, which is equivalent to interest on Town debt in the Current Model. Return on rate base is made up of interest on debt and return on equity. Please refer to Appendix C for further detail. Between depreciation and return on rate base, the full cost of invested water and wastewater capital is recovered as required by legislation; and PwC 22

31 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Required Revenue: Utility Model Step 4 Current Model Utility Model Comments Operations & maintenance Renewal capital future provision Renewal capital current year Growth capital Less Development charges rec d Operations & maintenance Depreciation Common to both models No provisions in utility model Renewal and growth capital to utility rate base, less amount recovered in DCs. Funded by utility debt and equity Depreciation recovers investment principal, and is for all capital assets that are in rate base. Depreciation reduces rate base Return on rate base Return on rate base is equivalent to recovery of interest on Town borrowing for water and wastewater assets. It is made up of interest on utility debt and return on utility equity Town debt or developer advances PwC Required to balance cash Because the utility has the ability to raise financing to meet investment requirements in each year, no Town debt or developer advances are required to balance cash requirements. The sum of the components described above is the revenue that must be raised from rates in each year. Given the uneven nature of some of the expenditures (in particular growth capital), the required revenue may vary significantly from year to year. In these circumstances, the authorities giving direction to the utility (Council in this case) may require adjustments to rates if (for example) smoothing of rates is deemed in the best interests of ratepayers (see Appendix C). The concept of rate smoothing is also commonly undertaken in the Current Model. PwC 23

32 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case 5.2 Regulation In the Ontario electrical distribution system, electrical utilities are regulated by the Ontario Energy Board ( OEB ). The OEB regulates such matters as: The deemed ratio of debt to equity; The allowed return on debt and equity; and The allowance of costs (operating and capital) for rate-setting purposes. The OEB does not regulate water and wastewater in Ontario. The governing document for a Town water and wastewater utility would likely be through a formal governing Town by-law (see Section 6.7). The Town and the utility may agree to use certain guiding principles that are consistent with the OEB regulatory framework but that remains a possible future governance decision. Further information on a potential Town water and wastewater utility is provided in Appendix C. 5.3 Utility Model versus Current Model There are several important differences between the current model and the Utility Model for water and wastewater (implemented within the MSC structure). As is the case for InnPower, debt financing is external to the Town and no Town debt is involved. Assuming that the utility is properly structured for credit-worthiness (see Appendix C), it can be expected to have access to both equity and debt financing on terms broadly similar to InnPower; Developer advances are not necessarily required, although DCs would still be collected. O.Reg 599, ss. 21(3) will allow the MSC to collect DCs the same way as the the Town. The financing requirement associated with collection of capital contributions in arrears is financed by the utility with any financing charges added to capital contributions (as interest is added to DCs in the Current Model) so that ratepayers are kept whole over time with respect to financing charges related to collection of capital contributions in arrears; and In the Current Model, renewal capital is paid for by ratepayers far in advance, with funds held in reserve accounts earning little interest for many years. In the Utility Model, renewal capital assets are paid for when put into service by the ratepayers actually using them. 5.4 Economic Comparison - Assumptions A financial analysis was undertaken to determine the potential economic impact on ratepayers and developers, under the Utility Model versus the Current Model. For this analysis: The Strategic Program is implemented in both the Utility Model (within the MSC structure) and the Current Model. In the Current Model, the Strategic Program is assumed to be financed by Town borrowing (in the DC Reserve Fund), although as set out in Section 3 this option is not viable.; and In the MSC structure (one MSC for the water and wastewater utility and a MSC acting as a holding company) using the Utility Model, the Strategic Program is financed by the water and wastewater utility. DCs are set by Council in this example at 60% of Strategic Program investments plus interest, to enhance regional competitiveness of the Town for development activity. Council may also vary the reduction in DCs by type of development, for example reducing DCs for industrial development while maintaining current levels for residential. In this example DCs in the Current Model remain at 100% as described in Section 3. In the Utility Model within the MSC structure, capital contributions are collected in cash in arrears on the same pattern as projected DCs and defray a portion of the Strategic Program costs. The portion of Strategic PwC 24

33 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Program costs which are not collected as capital contributions is included in rate base and supported by ratepayers. In practice, the level of DCs (or discount from 100% recovery) would be based upon Policy direction from Council. The required revenue of the utility company would include a return on the Town equity associated with contribution of the existing water and wastewater assets. The Town elects to recycle these dividends to mitigate ratepayer cost (see Appendix C) A complete explanation of the assumptions used is provided in Appendix C. 5.5 Economic Comparison - Results This section sets out the comparison of potential outcomes under the Utility Model versus the Current Model. The first point of comparison between the potential Utility Model and the Current Model is that under the Utility Model implemented within the MSC Structure the Strategic Program is attainable whereas under the Current Model it is not. Required Revenue and Rates The second point of comparison is ratepayer value required revenue and rates. In this analysis, both the Current and Utility Models are shown on a smoothed all-in (that is, total required revenue divided by total volume) basis. The required rate is shown below. Utility rates are similar to the Current Model at the start of the analysis period, and trend lower over time. PwC 25

34 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case All-In Rate Comparison: Utility (Smoothed) vs Current Model Illustrative $6.00 $5.00 $ all-in per cubic metre $4.00 $3.00 $2.00 $1.00 $ Utility Model, net of Town dividend recycle, smoothed Current Model, incl DC Reserve Interest All-in rates are total revenue requirement divided by total volume. The allocation between fixed and variable rates is at Council discretion PwC DCs A third point of comparison is competitiveness for development. In this analysis this is measured by a comparison of the DCs required under the Current Model, versus those required under the Utility Model. This comparison is shown below. The Utility Model creates the opportunity to make substantial improvements to the Town s competitiveness through reduced DCs. PwC 26

35 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case DCs - Utility vs Current Model $ millions , principal and interest Existing Town model assumes 100% of strategic capital is recovered in DCs with interest 197 Illustrative In illustrative utility case, Council elects to recover 60% of strategic capital as capital contribution, plus interest 50 - Current Model Utility Model PwC Source: Town rate studies, PwC analysis What Makes This Possible? What makes this possible is that under the Utility Model, the substantial ratepayer pre-funding of renewal capital many years in the future is not required. Starting with the future rate revenue indicated by Town rate studies, this advance ratepayer funding of renewal capital (which is not needed in the Utility Model) can be re-allocated (at Council s discretion) to a combination of: Support for the Strategic program so that it may be accomplished; Providing for some flexibility in consideration for the Reduction of DCs; and Over time, lower water and wastewater rates. As shown in Section 3.2, under the Current Model this ratepayer pre-funding of renewal capital is very substantial. It should be noted that under the Utility Model, renewal capital is indeed funded. It is funded by depreciation and return on rate base for these renewal assets starting when they go into service in the future, in turn funded by rate revenue at that time. Of course, the depreciated assets being replaced would at that time no longer give rise to a ratepayer revenue requirement. PwC 27

36 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Water and Wastewater Required Rate Revenue $25 $20 $ millions nominal $15 $10 $5 $ O&M Near term capital Life cycle capital Source: Town water and wastewater rate studies prepared by DFA Infrastructure International PwC PwC 28

37 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case 5.6 Does the MSC Structure with the Utility Model Meet the Town s Needs? Based on the analysis above, the Utility Model within the MSC structure appears to offer the Town an attractive alternative: This approach achieves full cost recovery of water and wastewater services as required by legislation; Assuming properly structured agreements supporting credit-worthiness (see Appendix C), a Town water and wastewater utility should be able to raise the required financing to implement the Strategic Program the Strategic Program would be feasible; No Town debt is required. The water and wastewater utility company (a Municipal Services Corporation) will borrow on its own account and its debt will not be attributed to the Town (this is currently the case for InnPower); No Developer advances are required and DCs for industrial and commercial development may be reduced compared to the Current Model; and Rates would be established by Council and where applicable rate reductions may be achieved in comparison to the Current Model. PwC 29

38 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case 6 Implementation Considerations This section sets out some of the considerations associated with implementing a MSC for water and wastewater. The creation of a MSC for water and wastewater would be a first for Ontario, although all the component parts of this model are well established. 6.1 The Municipal Services Companies Legal counsel has provided advice concerning the structure of the water and wastewater utility company ( UCo ), according to the following principles set out by the Town. UCo would be a Municipal Services Corporation (MSC) established under the Ontario Business Corporations Act and the Municipal Act, Regulation 599/06. This structure is expected to be feasible within current legislation and regulation. Where necessary, required amendments to legislation and regulation will be highlighted for Town engagement with the Province; The Town will have 100% of the voting shares and direct appointment of the directors of UCo s Board; under current legislation the former is required; The requirements for qualification as a Government Business Enterprise (see Appendix C) may be met in the MSC if properly structured; The structure will accommodate potential future participation by other municipalities; and UCo will achieve corporate tax-free status. Preliminary analysis also indicates that a second MSC acting as a holding company (HCo) would be formed. This could enable the recycling of dividends while enabling the Town to achieve Government Business Entity treatment of UCo debt (please refer to Appendix C). Strategic Investments The Town can establish UCo as described above, and adopt the Utility Model, without outside assistance or investment. However, Council through the MSC may elect to engage a future Strategic Investor to support its equity investment and/or augment the Town s technical capabilities. The UCo structure (unlike the Current Model in which water and wastewater services are provided by a Town department) will enable flexibility in procuring investment capital. The MSC may seek out financing through a variety of channels to obtain the most attractive financing options. It is clear that investment into the MSC must be by means other than shares in order to comply with current legislation. The nature of the required investment instrument may warrant further study once the MSC is further advanced. 6.2 Shares and Shareholding The structure of various classes of shares through which the Town may invest in the MSC is the subject of study by the Town s advisors as this report is written. 6.3 Governance Subject to advice of legal counsel, the high-level governance framework may include the following: HCo Board composition: it is contemplated that all of Council would be appointed as the Board appointees. PwC 30

39 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case UCo Board composition: at the concept stage, it is contemplated that the UCo Board would contain Town appointees but not elected officials. This is because the Town (potentially via a Town holding company) and UCo will be parties to one or more important contracts (see below); having elected officials on the UCo Board could create a conflict of interest. Maintaining an arms-length relationship between the Board and Council also works well from best practices governance process, especially given the role that Council will play in setting the rates. Required revenue and rate setting: The MSC would be charged with bringing forward its required revenue and rates, perhaps with a range of options as applicable and in accordance with the master contract described in Section 6.7. Council would, again in accordance with the master contract, give appropriate direction. Key appointments such as the UCo/HCo General Manager/CEO would be originally established by the Council as part of the start-up but future appointments would be made by each Board; Town oversight: The Town s oversight powers will be set out within one or more long-term agreements and/or a governing by-law between the Town and UCo (see below). 6.4 Financing and Dividends Assuming the requirements for qualification as a Government Business Enterprise are met (see Appendix C), debt raised by UCo has no recourse to the Town, is not accounted for as Town debt and does not count towards the Town s debt limit (in the same manner as InnPower). Debt service (principal and interest) is funded by the depreciation and return on rate base components of required rate revenue (see Section 5.1). With respect to dividends, these would be declared and paid according to established utility practice as is the case at InnPower. 6.5 Existing Debt and Reserves As at January 1, 2015, the Town has on its books both debt and reserves associated with water and wastewater. These may be addressed in the Utility Model as follows: Debt and Liabilities As at April 29, 2015, the water and wastewater-related debt was nil. Projected debt to be incurred in 2015 for water and wastewater (all of which is associated with DCs) is approximately $4 million to cover existing unfunded capital expenditures. In addition there is a long-term payable to Bradford West Gwillimbury of $3.3 million for previous water capital works which is due no later than February These liabilities would transfer to the UCo. Reserves and Receivables Under the Current Model, the reserves are funds paid by ratepayers for future renewal (replacement or refurbishment) of existing assets. It is proposed that these reserves be conveyed to UCo and be used to smooth or reduce water and wastewater rates on Council direction. As at January , these asset renewal reserves were approximately $11 million. Bradford West Gwillimbury owes the Town $3.9 million, due no later than 2018, for their share of previous water capital works. These receivables would transfer to the UCo. 6.6 Governing By-Law The Town will put in place the appropriate by-law(s) to establish the Utility Model and periodically grant necessary approvals, rate orders, and other directions and measures required for the continuing operation of UCo. PwC 31

40 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case 6.7 Master Contract Town and Municipal Services Companies Subject to the advice of legal counsel, the Town and UCo will enter into long-term agreements which define the relationship between the Town and UCo and UCo s role as the Town s water and wastewater utility, including The scope of responsibility for UCo, including the obligation to provide water and wastewater services to all existing Town customers and areas and new Town expansion such as the Employment Lands; Quality compliance and performance standards, reflecting prevailing provincial legislation and regulations; Reporting for regulatory compliance, environmental and financial stewardship, customer service quality, and other matters as agreed by the parties; The payment model: o Overall, how the full costs of service for water and wastewater will be recovered; o The revenue and rate establishment process, including: Submission requirements of UCo; Town obligations to review and approve; and Billing, collection, and related matters; o Provisions for performance-based adjustments to UCo revenue (if any); o Externally-sourced values in lieu of an independent regulator. The parties may agree, for example, to follow published OEB guidance on such matters as the return on equity, and the proportions of UCo debt and equity; o Matters of discretion reserved to Town, such as the proportion of growth capital expenditures which are to be recovered as capital contributions, and Town direction on rate smoothing (see Appendix C); Insurance requirements; Provisions enabling future new municipal partners, if and where applicable; Dispute resolution; Term (even if perpetual) and termination, including any applicable buy-out provisions; and Other matters, including a provision for direction by the shareholder (the Town) through the HCo. 6.8 Employees and Business Services Employees At present, the Town has 16 permanent employees performing water and wastewater services (including management), 1.5 full time equivalent engineering staff and one contract engineer. The Town projects that 5 of these employees will retire within the next 5 years. Town water and wastewater employees will become employees of UCo. It is presumed that the existing collective bargaining arrangements will have successor rights. It is also presumed that employees of UCo will maintain their status within the OMERS Pension Plan. PwC 32

41 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Human resources administrative and other services will be provided in a manner to be determined internally by UCo, or under contract with the Town, InnPower or another provider or providers as may be agreed upon by the parties. Business Services Similarly, there are a number of business services that will need to be provided (and staffed for) either internally or under contract(s), including: Billing and collection. An important consideration is UCo access to the tax roll for unpaid bills as at present; Engineering services; Financial services; Legal services; Information technology services; Human resource services; Insurance management; and Other subject to further analysis. At present, the Town has a service agreement with InnPower for provisions of billing and collections for water and wastewater. This arrangement could be carried over to the MSC. Some services may continue to be provided by the Town under contract. Where services are provided to the MSC, the appropriate service agreements would be executed. 6.9 Responsibility and Liability According to applicable legislation and subject to the advice of legal counsel, the Town will continue to hold and be responsible for the applicable water and wastewater licenses. The liability of Council members defined in legislation will continue to apply; the oversight and reporting requirements of UCo to the Town (and Council) will be designed with this liability in mind. 6.10Legislative and Regulatory Considerations The Town is engaging the Province concerning any changes to legislation or regulation that may be required to implement the Utility Model for water and wastewater. On February 4, 2015 the Province amended O. Reg 599/06 removing the requirement to repay the Province for any previous grants or payments towards the water and wastewater infrastructure if the assets are transferred into a MSC but a similar requirement still remains in the Capital Investment Plan Act. Legal counsel are reviewing these matters Summary Implementation Considerations In keeping with the concept-level stage of development for the MSC structure with the Utility Model for Town water and wastewater service, there are many implementation considerations outstanding for which considerable work lies ahead. However, as at this writing, there do not appear to be any insurmountable obstacles. PwC 33

42 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case 7 Summary and Recommendations 7.1 Summary To summarize the main points of this document: The Town has historically and most recently continues to face pressing strategic challenges to its ongoing viability within the County structure given the growth aspirations by the City of Barrie (Section 2); The Employment Lands are an important component in the Town s long term strategy (Section 2); Significant investment in water and wastewater infrastructure is required in order to realize the potential benefits of the Employment Lands (Section 2); The Current Model for funding water and wastewater assets and operations does not facilitate the required water and wastewater investment (Section 3); The proposed solution is a Municipal Services Corporation structure using the Utility Model of financing; A Utility Model - already used for InnPower and other Ontario electrical utilities - offers the potential to secure the desired strategic investment in water and wastewater assets without additional Town debt, while maintaining prospective rates at or below currently projected levels and enhancing Town development competitiveness. (Section 5); and Utilization of the Utility Model within the MSC structure would be a new approach for Ontario municipalities, although all the component parts of this model are well established. Adoption of the MSC structure (including HCo) and utilizing the Utility Model for water and wastewater would provide the latitude and flexibility required by the Town to achieve its strategic investment needs and to liberate the job creation potential of the Employment Lands. 7.2 Recommendations The Town should: Give serious consideration to advancing the MSC structure using the Utility Model for water and wastewater and the incorporation of a MSC holding company; Begin community and stakeholder consultations according to Town policy. PwC 34

43 Appendices

44 Appendix A Glossary of Terms Term Capital Expenditure Council Current Model Depreciation Development Charge or DC Employment Lands IES HCo InnPower Municipal Services Corporation or MSC O&M OEB Definition Expenditures on the water and wastewater system to fund construction of water and wastewater assets (or improvements on these assets) with a life beyond one year The Mayor, Deputy Mayor and Councillors of the The model for funding and operating water and wastewater services currently employed by the Town and other Ontario municipalities An annual expense equal to the initial investment in a capital expenditure divided by the useful life of the investment. The utility records the sum of depreciation for all fixed assets as its depreciation expense for the year Charges levied on developers to defray (in whole or part) the cost of capital expenditures incurred to expand the Town water and wastewater system, as defined in the Development Charges Act Lands along the highway 400 corridor which have been identified by the Town to be developed for industrial and commercial use, which will create employment opportunities Innisfil Energy Services, a company wholly owned by InnPower The proposed Town owned holding company Formerly Innisfil Hydro, the electrical distribution utility serving Innisfil and a portion of Barrie An Ontario municipal corporation established under the Municipal Act Reg. 599/06 and the Ontario Business Corporations Act. Operations and maintenance costs incurred in the delivery of water and wastewater services in each year, including costs for wages and salaries, supplies, energy, taxes and contracted services; but excluding capital expenditures Ontario Energy Board, an independent Ontario regulatory body responsible for regulation of the Ontario electricity and gas industries. The OEB operates under the authority of the provincial Ontario Energy Board Act. PwC

45 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Term Province or Provincial Strategic Investor Strategic Program Town UCo Utility Model Definition Province of Ontario A party external to the Town which may be engaged by the Town as described in Section 6.1 The water and wastewater capital investment required to achieve the Town strategic vision and specifically to develop the Employment Lands The Corporation of the The proposed Town water and wastewater utility company An alternative means of funding and operating water and wastewater services, as described in Section 5 of this report, and similar to the electrical distribution model employed by InnPower PwC

46 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Appendix B: Bibliography Asset Management Plan, January 2014, prepared by AECOM Cost of Capital Parameter Updates for 2014 Cost of Service Applications, issued by the Ontario Energy Board November 20, 2014 Development Charges Act, 1997, S.O Chapter 27 Development Charges Background Study, February 4, 2014 prepared by Hemson Consulting Inc. Sustainable Water and Sewage Systems Act, 2002, S.O Chapter 29 Town Excel files CALC Water Services and CALC Wastewater Services (setting out projected O&M and renewal capital costs) Town Excel file Revised Innisfil Servicing Plan Town Excel file Water and wastewater alternatives DevChgs financial statements, 2012 Debt Management Policy Water Rate Study and Wastewater Rate Study, April 15, 2015, with appendices and associated Excel files, prepared by DFA Infrastructure International Inc. PwC

47 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Appendix C: Adapting the Utility Model to Water and Wastewater This Appendix provides additional technical detail on how the Utility Model may be adapted to water and wastewater: Certain financial parameters have a strong impact on ratepayer cost. How are these determined? How is return on rate base calculated? What is credit-worthiness, why is it important, and how may it be assured in the Utility Model for water and wastewater? How are DCs managed, and in particular their collection in arrears? How is the required revenue for the utility determined? How will rates be calculated? What is rate smoothing and how does it work? How will the existing Town water and wastewater assets be treated? What assumptions were used in this illustrative business case? It is assumed that readers of this Appendix are generally familiar with accounting and financial concepts. Key Financial Parameters As is the case with InnPower, in the Utility Model for water and wastewater there are several financial parameters that have a strong effect on utility required revenue and therefore water and wastewater rates. These are: The capital structure of the utility that is, the ratio of debt to shareholder equity; The return on shareholder s equity or ROE; and How interest expense is recovered by the utility. The Town may, of course, adopt values for these parameters other than as described below. Capital Structure It is assumed for purposes of this report that the maximum allowable leverage for the utility will be that specified by the Ontario Energy Board for InnPower and other Ontario electrical local distribution companies. This ratio is 40% shareholder s equity and 60% debt. This has been shown to be accepted in the financial marketplace, enabling local electrical distribution companies to raise financing as required. Initially, UCo will have 100% equity as a result of the contribution of existing water and wastewater assets by the Town. UCo will finance new investment in water and wastewater assets by debt. If required in order not to exceed maximum leverage, the Town would invest additional equity; this is not required in the case illustrated in this document. PwC

48 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Return on Equity (ROE) For new assets, it is assumed for purposes of this report that the Return on Equity ( ROE ) for the water and wastewater utility be that specified by the Ontario Energy Board for InnPower and other Ontario electrical local distribution companies. At this writing, this ROE is 9.30%. For the Town equity represented by the contribution of existing water and wastewater assets, the ROE is assumed to be 5%. This lower rate is favourable to ratepayer cost. Recovery of Interest Expense The Ontario Energy Board publishes expectations concerning the interest rates that local electrical distribution companies will achieve for newly-issued debt. However, every utility issues debt at different times for different amounts, and the actual interest expense on this debt is recovered in rates. Return on Rate Base Return on rate base is a component of utility cost recovery. It represents the recovery of all financing costs for all assets whether for growth or renewal which have been financed by utility debt and equity. Return on rate base is calculated as follows: Return on Rate Base Fixed assets* net of depreciation Rate base Equity Return on Equity Return on rate base Working capital Debt Interest rate * All assets, existing and growth, net of external capital contributions PwC PwC

49 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case The rate base in a utility is made up mostly of fixed assets. For purposes of rate base calculations, the value of fixed assets is net of accumulated depreciation (depreciation being annual expense equal to the amount of a capital investment divided by its useful life). Rate base also includes an allowance for working capital. The rate base is made up of equity and debt, according to the approved capital structure (see above). The equity portion recovers a return equal to the equity portion of rate base times ROE (see above). The debt portion recovers actual interest expense incurred in the year. Return on rate base is the sum of return on equity and interest expense. Credit-Worthiness and Debt Attribution An entity is credit-worthy when lenders will lend to it on reasonable terms (interest rate and repayment terms, in comparison to similar entities), and equity investors will invest. Credit-worthiness is important because it enables an entity specifically the water and wastewater utility to obtain financing in order to invest in assets. For the Town, this is particularly important because of the magnitude of the investment required. The credit-worthiness of the utility is also important in order that the debt of the utility is not attributed to the Town that is, no Town guarantee of utility debt is required and the Town is not required to support the utility financially. Specifically, the desired treatment of utility debt will be achieved if the utility is considered a Government Business Enterprise or GBE. The test for qualification as a GBE include (according to Public Sector Accounting Standards): Existence as a separate legal entity that can contract in its own right; Delegated (by the Town) the financial and operational authority to carry out its business; Sells its goods and services principally to individuals and organizations outside the parent government; Meets, in its normal course of operation, all of its costs and liabilities from revenues obtained from sources outside the parent government. InnPower meets these requirements, and it is important that the water and wastewater utility do so as well. In the context of a utility, credit-worthiness relies on two main factors: The assurance of revenues, and their adequacy to recover all costs including depreciation (which supports repayment of debt principal) return on rate base (which supports payment of interest). The contractual agreements between UCo and the Town (see Section 6.7) will need to provide for such full cost recovery in detail; and The stability of the regulatory and contractual environment in which the utility operates. If the revenue model for the utility is subject to unfavourable change, lenders and equity investors will justifiably be reluctant to provide financing. The capital structure (see above); and Debt service coverage, which in any period is funds available for debt service (revenues less operating expenses) divided by debt service. Ensuring credit-worthiness for the water and wastewater utility will ensure availability of required investment financing at appropriate cost, in turn enabling the Town s strategic water and wastewater investment. PwC

50 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case DCs As is the case with the Current water and wastewater Model, and with InnPower in its Utility Model, DCs related to growth investment will be required in the water and wastewater utility. Development Charges At the present time, these capital contributions are part of the Development Charges levied on developers when building permits are issued. Development Charges also recover Town costs for other assets such as police, library, fire, cultural and recreational. Development Charges are governed by the provincial Development Charges Act which sets out the maximum charges allowed. There is no minimum and some Ontario municipalities assess Development Charges at a rate less than full recovery of growth capital costs; they do so in the overall interest of the community as assessed by their respective councils. DCs in the Utility Model In the Utility Model, DCs will apply. Currently, InnPower levies capital charges when new growth electrical distribution assets are required. In the water and wastewater Utility Model, DCs will be assessed according to Council directives and would be based on the current DC Act principles. The level of DCs (as a percentage of the total growth capital costs) apportions the cost of growth assets between the specific developers (and therefore new property owners) using the growth water and wastewater assets, and the Town ratepayers at large. This apportionment will be made by Council in the overall interests of the Town as assessed by Council. Key Challenge: Collection in Arrears An important challenge in adapting the Utility Model to water and wastewater is that DCs are collected in arrears. The Town makes the investment in water and wastewater assets, and only collects the DCs in cash years afterwards. The challenge this presents under the Current Model is described in Section 3. Electrical utilities such as InnPower generally do not face this lag in collection of DCs, so additional provisions described below must be made to adapt the Utility Model to water and wastewater. The DCs which are not yet collected in cash is referred to in this document as DC-R or DCs recoverable. PwC

51 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case DCs Recoverable DCs Assessed $ DCs received in year DCs Recoverable Time PwC When a growth investment is made: The portion that is not to be recovered as DCs assigned to rate base. It is financed by the utility (debt and equity) and its costs are recovered over time as described in Section 5 The portion to be recovered as DCs is accounted for separately from rate base. Initially, no DCs are collected, so the entire amount is DC-R. This is an asset that is also financed by the utility (debt and equity); and For a given growth investment, the sum of rate base and DC-R above is equal to the total amount of the growth investment. This model is broadly similar to the Current Model is the sense that Town stakeholders stand behind the financing obligations that arise due to collection of DCs in arrears. In the Current Model, this is Town borrowing; in the Utility Model it is DC-R financed by the utility. PwC

52 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case DCs Recoverable vs Town Borrowing Model Town Borrowing Proposed Utility DC-R Principal Interest Principal Interest Recourse/ responsibility Town / Taxpayers Ratepayers Financing Town borrows funds in advance of DC inflow Debt principal retirement is obligation of Town Debt interest is obligation of the Town DC-R is financed by the utility (debt and equity) If applicable, a minimum principal retirement is guaranteed by ratepayers ( backstop ) in years when DC collections are low DC-R attracts a return on debt and equity, which adds to balance until retired Recovery DCs are sufficient to retire debt principal Debt interest is added to DCs and recovered as DCs are collected DC charges recover all DC-R principal and any backstop DC charges include full recovery of DC-R return PricewaterhouseCoopers LLP Provisions Supporting Credit-Worthiness Lenders and equity investors require assurance that all costs of the utility will be recovered in utility revenue. A cost to be borne by the water and wastewater utility (not applicable to electrical utilities) is the return on DC-R that is, interest on the debt and return on the equity raised to finance the DC portion of the growth investment. In the proposed model, this return on DC-R is recovered as part of the utility revenue requirement and makes up part of the water and wastewater rates. However, this return on DC-R is not a cost which should be borne ultimately by ratepayers. Therefore, the return on DC-R which is paid by ratepayers is recovered from developers as an addition to the DC charges, and refunded to ratepayers when DC is collected in cash. This is similar to the existing mechanism whereby interest on Town debt incurred for growth investment in water and wastewater assets is added to Development Charges assessed. There is the potential that a minimum DC debt principal repayment will be required by lenders. If this is the case and this is subject to utility negotiations with lenders in the implementation phase an additional amount may need to be included in utility required revenue in order to meet such a requirement. If this is the case, any such amounts paid by ratepayers would be recovered and refunded in full to ratepayers as DC charges are received in cash. It should be noted that in the Current Model, Town financial stakeholders are responsible for debt principal payments. PwC

53 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Required Revenue Utility Model for Water and Wastewater With these provisions, the revenue requirement for the water and wastewater utility would be: The utility required revenue described in Section 5; Plus any additional amount required to pay return on DC-R; Less recovery of DC-R on collection of DCs; Plus any additional amount required to meet DC-R principal repayment; Less recovery of these additional principal amounts on collection of DCs. Cost Recovery - Utility Model Water and Wastewater Total $ utility revenue requirement in year Return on DC-R Refund of return on DC-R DC-R principal repayment support Refund of DC-R principal repayment support Total $ utility revenue requirement in year water/ wastewater PwC Dividend Recycling In the case analyzed for purposes of this business case, UCo required revenue includes a return on equity to the Town, related to the contribution by the Town of the existing water and wastewater assets. With the inclusion of this amount in required revenue, credit-worthiness metrics notably debt service coverage (see above) are met. The Town does not currently realize any comparable return on the existing water and wastewater assets. The Town may, at Council s discretion, elect to recycle such return (which it would receive as dividend income) back to UCo PwC

54 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case with the direction that the establishment of ratepayer rates take such recycled amount into consideration. This would not compromise Town finances, as no existing income is foregone. Ratepayer cost would be reduced. This dividend recycle framework would, according to preliminary analysis, require a second MSC to act as a holding company for UCo and receive UCo dividends. This structure could, according to preliminary analysis, enable the Town to meet the requirements for GBE treatment of UCo debt. The analyses underlying this business case assume that the Town implements dividend recycling. Dividend Recycling Costs recovered Gross ratepayer revenue Town dividends returned as subsidy Net ratepayer revenue Equity return + Depreciation, existing assets Interest + Depreciation, new assets O&M PwC Rate Calculation Water and wastewater rates will be calculated in the Utility Model in the same manner as at present. The calculation starts with total required revenue; Any recycled dividends would reduce the amount to be collected from ratepayers; Council apportions the amount to be recovered in fixed ratepayer charges (dollars per connection) versus the amount to be recovered as a variable charge per cubic metre of water and wastewater; and PwC

55 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Fixed and variable rates are calculated using the number of connections and volume of water and wastewater. Rate Setting Fixed $ component Number of connections Fixed rate per connection Total $ revenue requirement in year Variable $ component Volume of water/ wastewater Variable rate per m 3 PwC The Utility Model affects the required revenue, but does not affect the rate-setting mechanism. Rate Smoothing Water and wastewater required revenue under the Current Model or the Utility Model can vary from year to year. Council may elect not to expose ratepayers to sharp increases or decreases in rates, but rather to smooth rates by saving revenue from some years and applying it in other years to reduce the rate revenue requirement in those years. Current Model Rate smoothing is common in water and wastewater. The water and wastewater rate analyses conducted by the Town s rate advisors used two smoothing tools: The cash requirement for capital investment was expressed as a contribution to a fund from which the actual expenditures were to be funded; and A rate smoothing account was proposed to further mitigate sharp rate changes over time. PwC

56 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Utility Model To implement rate smoothing in a Utility Model, Council would: Require the utility to project its required revenue in the future based on the best available information. The most important values which are subject to fluctuation are the required growth capital (which is linked to Town strategy) and renewal capital (which is linked to Town and utility engineering studies); If the future required revenue appears to Council to be more volatile than desired, require the utility to propose a smoothed revenue stream which delivers the same revenue over time, but avoid sharp year to year variations. This revenue stream may require borrowing by the utility which must be repaid later; Calculate rates based on the smoothed revenue stream; and Require annual reporting on the smoothing accounts as part of the utility s overall accountability, to ensure that objectives are met. Existing Water and Wastewater Assets There is a significant base of water and wastewater assets in the Town at present which are recorded in Town financial statements. Subject to further analysis and structuring, it is assumed in this business case that: Existing water and wastewater assets are contributed to the utility; Thereafter, the utility is responsible for operations, maintenance, and renewal capital investment with respect to these assets; The Town receives, as consideration for the existing assets, shares in the utility (either directly or via a holding company owned by the Town). The class of such shares and the terms and conditions attached are subject to further study; The existing assets will be recorded as assets on the accounts of the utility, and as Town equity. This equity associated with existing assets would earn a return which would be included in UCo required revenue; and The Town may elect to recycle dividend income associated with existing assets in order to mitigate ratepayer cost (see above). Business Case Financial Assumptions The business case analyses are based on the following assumptions for the implementation of the Utility Model: Parameter Operations and maintenance cost Growth capital investment Renewal or sustaining capital investment Useful life Assumption Same as Current Model, per Town studies Same as Current Model, per Town studies Same as Current Model, per Town studies 70 years for linear assets, 35 for non-linear, per existing Town practice PwC

57 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Timing of DC collection DC assessed DC-R Capital structure Return on equity, new investment (if required) Same pattern as Development Charges per Town studies 60% of total growth capital investment cost. The remaining 40% is recovered in rate base. This percentage is at Council discretion Calculated based on growth capital investment, DC assessed, and the timing of DC collection Maximum leverage of 40% equity, 60% debt deemed per OEB guidance 9.30%, per OEB guidance (2015) Cost of long term debt 4.77%, LT per OEB guidance (2015) Return on existing assets, before consideration of dividend recycling Town dividend recycling 5% Yes Average long-term cost of Town borrowing 5% Return on DC-R CIAC-R principal repayment CPI Working capital allowance Corporate income tax Calculated using weighted average cost of capital. Recovered in full and refunded to ratepayers as an addition to DCs Minimum 5% annual repayment of the sum of the opening balance and additions in the year (subject to negotiations with lenders). If DC receipts are insufficient, the difference is added to utility required revenue. Any such cost borne by ratepayers is refunded in full when DCs are collected. 2%, based on Bank of Canada target inflation 13% of operations and maintenance cost, per OEB guidance Nil Uco will be non-taxable. PwC

58 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Appendix D: Water Rate Study PwC

59 TOWN OF INNISFIL Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 dfa DFA Infrastructure International Inc.

60 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Table of Contents Transmittal Letter Table of Contents 1 Introduction Background Purpose Regulatory Requirements Provincial Regulations Methodology Full Cost Considerations Full Cost Assessment Rate Design Guiding Principles Rate Structures and Qualitative Analysis of Options Data Sources Customer Growth Current Water Customers Customer Growth Projections Water Volume Projections Water Consumption Water Consumption Projection Tangible Capital Assets (TCA) Capital Budget Requirements Debt Financing Reserve Fund Requirements Operations & Maintenance (O&M) Cost Projections Rate Stabilization Reserve Full Cost of Water Evaluation of Rate Structure Options Rate Structure Options Proposed Water Base Charges Proposed Consumption Water Rates By Rate Structure Option Customer Impacts Residential Customer Impacts Commercial Customer Impacts Institutional Customer Impacts Average Customer Bill Impact Preferred Rate Structure Option Projected Water Rates i DFA Infrastructure International Inc.

61 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, O.Reg 453/07 Water System Financial Plan No A Financial Statements Statement of Financial Position Statement of Operations Statement of Cash Flow Lead Service Pipe Removal Conclusions & Recommendations References Appendices Appendix A: Water Rate By-Law Appendix B: Qualitative Analysis of Rate Structure Options Appendix C: Customer Growth Projections Appendix D: Water Consumption Projections Appendix E: Capital Forecast Appendix F: Reserve Projections Appendix G: Operations & Maintenance Projections Appendix H: Base Charge Projections Appendix I: Consumption Water Rate Projections Appendix J: Residential Customer Impacts Appendix K: Commercial Customer Impacts Appendix L: Institutional Customer Impacts Appendix M: Customer Impacts Over Base Option Appendix N: Projected Base Charges and Consumption Rates Appendix O: Requirements of Ontario Regulation 453/07 Tables Table 3-1: Cost Components and Drivers Table 3-2: Data Sources Table 4-1: Current Water Customer Accounts Table 4-2: Customer Growth Projection Table 5-1: 2014 Water Consumption Table 5-2: Water Consumption Projection Table 6-1: Asset Amortization and 2015 Net Book Value (NBV) Table 6-2: Asset Replacement Needs Table 9-1: Average Annual Full Cost of Managing the Water System Table 10-1: Total Consumption Above Threshold Table 10-2: Residential Consumption Above Threshold Table 10-3: Seasonal Consumption Above Threshold Table 10-4: Proposed Base charge By Customer Class Table 10-5: Proposed Consumption Water Rates for the Years Table 10-6: Residential Customer Impacts for the Years Table 10-7: Commercial Customer Impacts for the Years Table 10-8: Institutional Customer Impacts for the Years ii DFA Infrastructure International Inc.

62 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Table 10-9: Customer Impact Over Base Option for the Years Table 10-10: Summary of Qualitative Analysis of Rate Structure Options Table 10-11: Projected Base Charges ( ) Table 10-12: Projected Consumption Water Rates ( ) Table 11-1: Statement of Financial Position Table 11-2: Statement of Operations Table 11-3: Statement of Cash Flow Figures Figure 6-1: 2015 Water Systems Value in 2015 Dollars Figure 7-1: Water Capital Reserve Closing Balance Projections ( ) Figure 7-2: Water Treatment Plant Replacement Reserve Closing Balance Projections ( ) Figure 7-3: Water Development Charges Reserve Closing Balance Projections ( ) Figure 7-4: Asset Life Cycle Reserve Fund (for Asset Replacement Beyond 2031) Figure 8-1: Rate Stabilization Reserve Figure 9-1: Annual Water Costs iii DFA Infrastructure International Inc.

63 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, Introduction 1.1 Background The provides drinking water to approximately 8200 customers through its Lakeshore Water Treatment Plant (WTP) which was commissioned in 1996, and four (4) ground water well supply systems. The Town recovers its costs from customers through base charges that apply depending on the customer type, and a consumption rate that is applied to the metered volume of water consumed. In addition to providing water to Innisfil customers, the Town also supplies Bradford West Gwillimbury (BWG) with a portion of its water under an agreement established in 2006 (amended in 2012) between the two municipalities. BWG is supplied from the Lakeshore Water Treatment Plant (WTP) via a water transmission main and booster station. The agreement establishes the basis for recovery of costs from BWG, apportioning asset replacement costs and the allocation of capacity of the WTP. The Town is considering expanding the Lakeshore WTP capacity to meet the future needs of both municipalities. In 2013, Innisfil loaned surplus plant capacity to BWG to increase the allocation of existing plant capacity to BWG from 7,100 to 10,700 cubic metres per day. Water conservation initiatives including leak detection and water loss reduction are also underway. DFA Infrastructure International Inc. (DFA) was retained by the Town to prepare a water rate study for all of the water systems. This includes an assessment of the full costs of managing the water systems and recovery of those costs through rates and charges. This study also includes a review of alternative conservation-oriented rate structures for consideration by the Town. The study period is for seventeen (17) years from 2015 to 2031 inclusive. A condition of the existing drinking water system licences is that the application for renewal of the licences must be submitted to the Ministry of Municipal Affairs and Housing (MMAH) by July 20, The licence renewal process mandates the preparation of an updated water system financial plan in accordance with O.Reg. 453/07. This document also presents the updated water system financial plan. 1.2 Purpose The primary purpose of this water rate study and financial plan is to: Identify the full costs of managing the Town s drinking water service to customers based on the most recent available information; Update the Town s current rates and charges to its customers, using the current structure of a base charge and uniform consumption rate per cubic metre that will recover the full costs of supplying and distributing drinking water to customers as a Base Option; Evaluate and compare alternative conservation-oriented rate structures against the Base Option, and recommend a preferred rate structure and rates for the recovery of the full costs of supplying and distributing drinking water to customers; and Present the information necessary for preparing a financial plan in accordance with the requirements of Ontario Regulation 453/07 and the Safe Drinking Water Act DFA Infrastructure International Inc.

64 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, Regulatory Requirements 2.1 Provincial Regulations Provincial requirements governing water services primarily include the following: The Environmental Assessment Act (EAA); The Safe Drinking Water Act (SDWA); The Municipal Act (MA); The Development Charges Act (DCA); The Sustainable Water and Sewage Systems Act, 2002 (SWSA); and The Water Opportunities and Conservation Act, 2010 (WOA). The first two (2) set out the technical requirements related to service delivery. The EA Act applies to expansion of existing facilities and establishment of new capacity such as the installation of new pipes to service growth in customers. The Safe Drinking Water Act, 2002 (SDWA) has significant implications to the daily operations as it sets out the water sampling and other operational requirements (in O. Reg. 170/03) for ensuring that the water delivered to consumers is of high quality and safe for consumption. The SDWA has been a major influence over the past decade in terms of adjustments to operational practices and water quality assurance. In addition, there is also a requirement under this Act (O.Reg. 188/07) for drinking water providers to establish a Drinking Water Quality Management System (DWQMS) and obtain licences for their respective water systems. As part of the DWQMS, and as required under O. Reg. 453/07 (Financial Plans Regulation), operating authorities must submit a financial plan for their respective water systems as a condition of licensing. There are also many regulations and guidelines that deal with design and operation standards that mandate certain activities be undertaken as part of service delivery. The Municipal Act, Part VII, Section 293 requires municipalities to establish reserves for dealing with long-term liabilities. This applies directly to the water systems and the future liabilities associated with their age and condition. The Municipal Act also permits the municipalities to establish fees for cost recovery and requires public input prior to any fee adjustments. The Development Charges Act and regulations establishes the requirements for the recovery of portions of future growth related capital expenditures to be incurred by municipalities. The Water Opportunities and Conservation Act, 2010 is the most recent legislation to be enacted influencing water system management. It requires sustainability plans to be prepared for water systems. The Sustainable Water and Sewage Systems Act, 2002 One of the main recommendations contained in Justice O Connor s report on the Walkerton incident is the need for municipalities to identify the full cost of water services and to develop a sustainable plan to finance these costs. This resulted in the establishment of the Sustainable Water and Sewage Systems Act, 2002 in December 2002 which requires operators of Water systems to report full costs and the method of cost recovery to the Province of Ontario. However, the Sustainable Water and Sewage Systems Act, 2002 was never proclaimed into force, nor were the regulations necessary for the act to operate ever developed. Under the Sustainable Water and Sewage Systems Act, 2002, the municipalities are required to submit to the Province of Ontario: A report prepared by a Professional Engineer, identifying the full cost of water services; 2 DFA Infrastructure International Inc.

65 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 A report identifying a sustainable method by which municipalities would recover these costs; The comments made by the Town s Auditor following a review of both reports; and Copies of Council resolutions accepting the recommendation of reports. The Water Opportunities and Conservation Act, 2010 The WOA was enacted in November 2010 and the regulations are pending. This legislation promotes water conservation and requires municipalities to develop: Water conservation plans; Sustainability plans for water, wastewater & stormwater management; and Asset management plans. Financial plans are required as a component of the water sustainability and asset management plans. The DWQMS Requirements Regulation 188/07 under the Safe Drinking Water Act requires Ontario municipalities to apply for and obtain Drinking Water System Licences as part of their overall DWQMS. One of the requirements to obtain a drinking water licence is to prepare and submit a financial plan in accordance with O.Reg. 453/07. A copy of the Town s initial financial plan was submitted to the Ministry of Municipal Affairs and Housing following Town Council approval on October 19, Regulation 188/07 under the Safe Drinking Water Act, 2002 requires Ontario municipalities to apply for and obtain drinking water system licences as part of their overall Drinking Water Quality Management System (DWQMS). One of the requirements for obtaining and renewing drinking water licences is preparing a financial plan in accordance with O.Reg. 453/07. In general, the financial plan must include financial statements on the following: The proposed or projected financial position of the drinking water systems; The proposed or projected gross cash receipts and gross cash payments; The proposed or projected financial operations of the drinking water system; and Details on the extent to which the above information applies to the replacement of lead service pipes, if applicable. Appendix O lists each requirement of the regulation and references the respective financial statements and other items that contain relevant information required under each item. The financial plan must apply to a period of at least six (6) years with the first year being the year the existing licence expires. A revised water system financial plan based on the results of the rate study covering the period 2016 to 2021 is contained in Section 11. Upon Council s approval the financial plan would be made available to the public at no charge and posted on the Town s website. The water system financial plan shall also be submitted to the Province as is required for Innisfil s water license renewal application. 3 DFA Infrastructure International Inc.

66 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 The By-laws The By-law No established the water rates and charges that apply to the various customers classes in An excerpt of the by-law showing the 2015 water rates and charges is attached in Appendix A. 3 Methodology The Rate Study gives consideration to the full costs (or the required investment) associated with managing the water systems over a seventeen (17) year period from 2015 to 2031 inclusive and the recovery of costs (or revenue plan) through proposed rates and charges to customers. Life cycle costs of assets are also considered well beyond the 17-year period to determine the full replacement and/or rehabilitation needs given that some water system assets (e.g. watermains) can have life expectancies in the 70 to 100 year range. A qualitative analysis of potential rates structures is also undertaken in relation to guiding rate design principles to identify rate structure options to be assessed. This qualitative analysis was reviewed with Town staff prior to selection of a short list of rate structures. Rates under selected rate structure options are compared and evaluated and a preferred rate structure and rates recommended. 3.1 Full Cost Considerations Calculation of the Town s full cost of managing the water systems is based on estimating and projecting the annual costs (in 2015 dollars), related to the primary activities required to deliver drinking water to customers. Higher costs are generally expected in the future as the water business environment changes. However, the impact can be mitigated by fully understanding, assessing and planning for future water system costs. Determination of the full cost of managing the Town s water systems takes into account the factors that have a bearing on the cost of providing a safe and reliable supply of potable water to the customers over the long-term. These included both current and future considerations that would influence the cost of managing the system (and the revenues required to sustain them). Table 3-1 notes the main drivers of cost. The assumptions made are noted in the respective sections of this report. Table 3-1: Cost Components and Drivers Cost Component Cost Drivers Future Cost Implications Water systems operations and maintenance (O&M) This is the annual cost of operating and maintaining the current system including direct (e.g. operations staff) and indirect costs (e.g overhead, charge backs etc). Changes in regulations can result in additional (O&M) activities and added costs. This was evident when the regulations under the Safe Drinking Water Act took effect. Municipalities were required to undertake specific activities in the interest of water quality management (e.g sampling, analysis and reporting of water quality). More recently, the DWQMS meant additional costs for water system operational plans and licensing albeit not annually. It is expected that pending regulations under the Water Opportunities Act may have a similar effect. This is a direct annual cost that is reasonably consistent (fixed) from year to year but requires adjustment to account for non-recurring items, operational changes, variable cost (e.g. chemical use) changes and inflation. Non-rate revenues from administrative fees and grants offset these costs. The long term impact of new regulations on costs are difficult to predict. However, the costs are expected to rise as more stringent requirements are established. 4 DFA Infrastructure International Inc.

67 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Cost Component Cost Drivers Future Cost Implications Customer Growth Consumption Volume (m3) New growth related services Asset preservation and renewal As the existing defined settlement areas are developed, the addition of new customers would increase the total demand for water. Consumption is a function of the number of customers (existing and new growth), weather conditions and the economic environment. The weather conditions have a significant influence on how much water is consumed in a given year. For example, lower temperatures and wet weather tend to result is less water consumption. Dry weather and higher temperatures increase water consumption. The loss of large (commercial or industrial) customers perhaps due to economic climate would reduce demand. This refers to installation of new assets to increase the system capacity to facilitate new development and build out of the approved service areas within the Town. This is mainly the replacement of aging Tangible Capital Assets (TCA) e.g. old water mains, plant components, well conponents etc. that have exceeded their service life. The increase in demand, if significant, would increase volumes consumed and variable costs in the year the new customers are added. The annual consumption volume is unpredictable. Fluctuations can result in higher than anticipated costs or lower revenues and lead to budget deficits. There is the need for contributions to an operating reserve to minimize the risk of deficits and stabilize rates (i.e. minimize rate spikes) Would result in capital investments in the year the new infrastructure is needed. Note that financing of these costs can be through debt or cash from reserves after third party contributions are considered (e.g. grants, developer contributions etc.) Would result in future capital expenditures in the year in which the assets require replacement or rehabilitation to extend their useful lives. Allowances must be made as part of the annual costs to account for the future replacement of these assets Financing can be through a combination of debt and reserve funds. However, this study assumes no future debt based on discussion with Town staff. Projections are done for the 17- year period and also beyond Other capital expenditures These are capital expenditures other than those needed for growth and asset renewal. These would include cost of studies and implementation of operational improvements of the water system such as water loss reduction measures and new watermain loops to improve water quality management. Would increase costs in the year the expenditure is required. Financing can be through a combination of debt and reserves. However, this study assumes no future debt based on discussion with Town staff. Capital Financing Capital financing for projects can be from four (4) main sources: Debt financing, reserves, annual rates and third party contributions (grants etc.). Grant funding is available only when approved and is therefore not a predictable source of financing for financial planning purposes. The greater the debt financing, the higher the annual amount (costs) needed to repay the principal Annual costs would increase to provide for reserve contributions and debt repayment. It should be noted that using debt financing would minimize spikes in funding required for capital projects and allocates cost to future users. 5 DFA Infrastructure International Inc.

68 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Cost Component Cost Drivers Future Cost Implications and interest on any current or future debt. Financing from reserves can only be used if sufficient funds are available. Therefore annual contributions to reserves are required to build balances for use in future years. Inflation Market competition and pricing This is the annual rate of inflation as reported by Statistics Canada for the provision for cost of living adjustments each year. The level of competition within the market place depends on the number of service providers available. Additionally, the capacity of industry service providers to meet the increasing demand for their services may tend to increase prices. Tender prices for future capital projects would be influenced by the market conditions at the time of tendering. Would result in annual cost increases. Potential higher prices depending on the future behaviour of the industry. 3.2 Full Cost Assessment The full cost assessment identifies the current and future costs (i.e. the full costs) associated with the management of the water system over the next seventeen (17) years (2015 to 2031). The key cost areas include: Operations & Maintenance (O&M) cost projections; Capital Budget based on the approved capital forecast; Tangible Capital Asset (TCA) projections including asset replacement needs; Debt servicing requirements; and Reserve fund requirements. The non-rate revenues associated with the systems are also identified. These are defined as revenues that are routinely generated each year by the daily operations and include administrative revenues such as service fees, penalties, operating grants, etc. It is important to note that the non-rate revenues do not include the revenues generated by the water rates (i.e. from the sale of water). The full costs developed through the various analyses in this study identify the revenue requirements for the water systems and form the basis for the future rates and charges. 3.3 Rate Design Guiding Principles The following are the underlying rate design guiding principles that were considered and approved by senior staff in identifying rate structure options to be considered for rate development. Specific emphasis was given to the principle of Reduce wasteful uses of water as the Town s Water Conservation and Efficiency Strategy recommended that the Water Rate Study evaluate and consider the use of conservation-oriented pricing structures: 1. Full Cost Recovery The full costs of managing the water systems should be recovered through the rates and charges to sustain adequate financing for the water systems in the future including asset replacement 6 DFA Infrastructure International Inc.

69 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 based on life cycle costs (consistent with Sustainable Water & Sewer Systems Act, 2002 & Water Opportunities Act 2010); 2. Reduce Wasteful Uses of Water - This promotes water conservation and encourages customers with peak demands that are significantly higher than their normal demands to reduce consumption (consistent with requirements of the Water Opportunities Act, 2010); 3. Fairness and Reasonableness (avoid discrimination) - The rate structure should not unduly benefit or adversely affect one customer class over another; 4. Ease of Administration - Rate structure should be simple; this would serve to minimize administration costs and facilitate easy understanding by customers; 5. Stability Major fluctuations in the rates and charges from year to year should be avoided by establishing and utilizing a rate stabilization reserve fund. The rates should also provide predictability in terms of revenues each year i.e. the portion of revenues from fixed and/or base charges should be sufficient to reduce risk of running deficits; 6. Industry Promotion All industries will be treated equitably with no specific incentives for a particular industry. The Town may wish to support economic growth by providing some incentives in the rate structure; and 7. Future Debt to be Avoided Debt financing of the future capital replacement projects related to the water system should be avoided, reserves should be established but not unduly overbuilt. 3.4 Rate Structures and Qualitative Analysis of Options The following rate structure options are evaluated in relation to the above underlying rate design guiding principles (all options except Fixed Fee and Uniform Charge are assumed to include a base charge component).: 1. Fixed Fee A single flat fee that applies to all customers; 2. Uniform Charge Constant volumetric charge that applies to all customers; 3. Uniform (with Base Charge) Constant volumetric charge and base charge (the Town s existing rate structure and most common in Ontario); 4. Declining Block Volumetric charge that decreases as water use increases; 5. Increasing Block Volumetric charge that increases as water use increases; 6. Seasonal Charge Volumetric charge that is higher only for water used during the peak water demand season; and 7. Excess Use Charge Volumetric charge that is higher for all demand during the peak water demand season in excess of a threshold. 7 DFA Infrastructure International Inc.

70 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 A qualitative analysis of the rates structure options is undertaken in relation to the guiding rate design principles to identify rate structures to be further assessed. The qualitative analysis of the rate structure options can be found in Appendix B. Based on the results of the qualitative analysis four (4) rate structure options were recommended by senior staff for further consideration and analysis. Rates under the rate structure options are compared and evaluated in Section 10 of this report and a preferred rate structure and rates are recommended. 3.5 Data Sources The primary sources of data used to prepare this financial plan are listed in Table 3-2. In addition, information was also developed from discussions with input from Innisfil s staff, as required. Table 3-2: Data Sources Item Data Source Asset Life Expectancy Town s TCA Policy Information Provided by the Town Asset Replacement Costs Town s TCA Policy Town s Asset Management Plan Historical Costs Provided by the Town indexed to 2015 Asset Values Town s TCA Policy Town s Asset Management Plan Information Provided by the Town O & M Costs and Revenue Projections Town s 2015 Water Operating Budget Capital Cost Projections Town s 2015 Water Capital Budget and Forecast Debt Information provided by the Town Town s 2015 Water Operating Budget and Capital Budget Forecast Investments, Reserve balances etc. Information provided by the Town Existing Customers Town s Customer count Provided by Innpower Growth Information Provided by the Town including DC Revenue Projections Water Volumes Town s actual historical Consumption Volumes and Estimates for 2013 and 2014 provided by Innpower 4 Customer Growth The cost of service depends on the number and type of (residential, commercial, industrial and institutional customers and corresponding water demand. Although most costs are fixed, variable costs such as annual chemical use and hydro costs can increase depending on the level of customer growth and water consumption. Capital costs related to increasing system capacity to accommodate customer growth can also be influenced by growth and demand. In addition, all rate structure options considered in this study are comprised of a fixed (base charge) per customer plus a consumption charge based on the metered volume of water consumed. Therefore forecasting customer growth and annual water consumption volumes by customer type are essential to projecting future costs, revenue requirements and rates. 8 DFA Infrastructure International Inc.

71 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, Current Water Customers There are approximately 8,200 current water customer accounts based on information provided by Innpower. This number is expected to increase significantly over the forecast period. Table 4-1 shows the current total number of customers including non-residential customers by class. Table 4-1: Current Water Customer Accounts 2015 Water Customer Accounts Water Customer by Type Metered Flat Rate Total Residential 7, ,973 Commercial Industrial Intitutional 9 9 Total 8, , Customer Growth Projections Table 4-2 shows the increase in total customers over the forecast period. Customer growth projections reflect the residential customer growth contained in Innisfil s 2013 Development Charges Background Study prepared by Hemson Consulting. Adjustments to these projections have been made to recognize the deferral of Friday Harbour s 1600 unit development from to Projected residential customer growth over the forecast period is 10,686 new residential units, with projected annual residential customer growth ranging from a low of 190 new residential customers in 2015, to a high of 1014 new residential customers in Non-residential customer growth is also derived from the 2013 Development Charges Study. Projected employment growth is converted to reflect forty-five (45) new commercial and three (3) new industrial customers over the forecast period. There is no projected growth in institutional customers. Detailed customer growth projections by customer class can be found in Appendix C. Table 4-2: Customer Growth Projection Water Customer Growth Projection Customers Residential Non-Residential Total Number of Customers 8,380 10,604 14,856 19,114 9 DFA Infrastructure International Inc.

72 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, Water Volume Projections 5.1 Water Consumption Table 5-1 details the estimated 2014 water consumption by customer class based on the billing records provided by Innpower, and the average consumption per customer. There were approximately 8047 water customers that consumed approximately 1,552,960 m 3 for the year. Residential customers accounted for 88% of the water consumed and non-residential 12%. The average residential and non-residential consumption were approximately 174 m 3 / year and 913 m 3 / year, respectively. Customer Class Table 5-1: 2014 Water Consumption 2014 Water Consumption Ave # of Users Estimated Total Consumption Average Consumption (m 3 ) / Customer Residential 7,837 1,361, Commercial , Industrial 18 14, Institutional 8 33,996 4,250 Average Water Consumption of the three (3) Non-Residential Classs is 913 m 3 /year 5.2 Water Consumption Projection It is important for the consumption projections to be reasonably conservative so that revenue projections are not unduly overestimated (leading to potential annual deficits). The process and assumptions used to estimate the volume of water to be consumed each year over the study period include the following: Consideration of the Town s commitment to water conservation through development and approval of a Water Conservation and Efficiency Strategy. This strategy was approved in 2014 and provides key strategies and initiatives to reduce consumption and water loss. To reflect the impact that these strategies and initiatives have to reduce the consumption of water, the water consumption projection assumes that the consumption rate (i.e. m 3 consumed per customer) would decline over time. A reduction of 2% per year in consumption per customer is assumed until 2019, after which the consumption would stabilize and remain constant for the remainder of the study period. Applying the calculated consumption rate per customer to the respective number of customers in each class to arrive at the annual consumption volumes projection for each year. The volume of water projected to be consumed over the study period is presented in Appendix D. Based on the growth projections and the assumptions made, Innisfil s water consumption is projected to increase from 1,582,033 m 3 in 2015 to 3,157,035 m 3 by The water consumption projections by customer class are shown below in Table DFA Infrastructure International Inc.

73 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Table 5-2: Water Consumption Projection Water Consumption Projection Customer Class Residential 1,385,412 1,396,156 1,417,847 1,447,444 1,478,820 1,546,195 1,617,948 1,689,700 Commercial 144, , , , , , , ,534 Industrial 14,588 14,291 13,993 13,695 13,397 14,142 14,142 14,142 Industitutional 37,481 36,716 35,951 35,186 34,421 34,421 34,421 34,421 Total Project Consumption 1,582,033 1,590,256 1,609,362 1,636,313 1,664,981 1,734,498 1,807,648 1,880,797 6 Tangible Capital Assets (TCA) The depreciation (amortization) of existing assets is a non-cash annual cost that reflects the annual use of assets until the end of their respective useful lives. Therefore, allowances must be made to finance the replacement and/ or rehabilitation of the existing assets once they expire and can no longer play a role in providing the required drinking water service to customers. However, it should be noted that since depreciation is based on the original (historical) cost at the time the asset was placed in service it does not account for inflation since the year of installation. Therefore, basing asset replacement costs on depreciation alone is not sufficient to cover the future replacement needs. Accordingly, replacement cost estimates based on indexing historical costs to the replacement year are used for projecting future asset replacement costs. TCA data contained in the Town s 2014 Asset Management Plan (updated to include Infrastructure Investments contained in the 2014 Capital Budget) was used to develop the financial information and asset replacement projections related to the Water System. The TCA projections are based on the following assumptions: Amortization of existing assets is based on the Town s Tangible Capital Assets Policies and Procedures. Amortization of new assets is based on straight line depreciation with full year depreciation charged in the year of acquisition; Historical costs, life expectancy and remaining useful life as per the TCA data provided by the Town; Replacement costs are based on indexing historical costs to the year of replacement using the appropriate Construction Price Indices; Fully depreciated assets continue to be used in service i.e. no asset removals; and New assets to be acquired are based on the capital forecast presented in Appendix E. The forecast includes projects in the Town s Capital Budget Forecast and asset replacement projections based on TCA analysis undertaken as part of the rate study. Asset Value The water systems are comprised of the following asset classes: Watermains; Hydrants; Valves; 11 DFA Infrastructure International Inc.

74 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Wells Reservoirs; and Treatment Plant. Table 6-1 shows the current asset value based on historical cost and accumulated amortization to This is reflected as the net book value (NBV) i.e. the accounting value, and indicates that the water system as a whole is approximately 16% depreciated or has approximately 84% remaining life based on the TCA data. This suggests that the water system assets are relatively new. Table 6-1: Asset Amortization and 2015 Net Book Value (NBV) 2015 Water Asset Details Historical Cost 133,289, % Accumulated Amortization 21,509,828 16% Net Book Value (2014) 111,779,796 84% The NBV of the water system does not truly represent the cost of asset replacement as previously noted. The total replacement value (in 2015) of the assets, not including land (as land is not a depreciable asset) is estimated to be $178,042,812 using historical costs inflated to 2015 dollars. As shown in Figure 6-1, the majority of asset values are in watermains 48% and the treatment plant 34% Water Asset Value Value $60,298,143, 34% $9,635,274, 5% $12,130,345, 7% $1,945,836, 1% $4,586,052, 3% $3,809,942, 2% $85,637,220, 48% Watermains Hydrants Valves Wells Pumping Stations Reservoirs Treatment Plant Total Replacement Value = $178,042,812 Required Renewal within 17 Years = $4,713,743 Required Renewal Beyond 17 Years = $173,329,069 Figure 6-1: 2015 Water Systems Value in 2015 Dollars 12 DFA Infrastructure International Inc.

75 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Asset Replacement Needs A TCA analysis based on asset information contained in the Town s 2014 Asset Management Plan was completed to determine the future assets replacement needs. This involved consideration of the following information for the respective assets: Historical cost; In- service or year of installation; Useful life expectancy and anticipated year of replacement; Replacement costs in 2015 dollars (developed by applying the appropriate historical Construction Price Indices to the historical costs); and Replacement costs in the future year of replacement (estimated by adjusting 2015 replacement costs using 2% inflation). The asset replacement and/ or rehabilitation requirements resulting from the analysis are summarized in Table 6-2. This shows that approximately $4.7 million is required over the next 17 years. Approximately $173 million is required beyond 2031 primarily for replacement of watermains and the water treatment plant. The annual asset replacement requirements between 2015 and 2031 are presented in Appendix E as part of the overall capital requirements for the study period. It is important to note that although these projections include review of the asset life expectancies noted in the PSAB 3150 TCA inventory from an engineering perspective, they do not consider the true current condition of the assets. Condition assessments may indicate that some assets could continue in service beyond their anticipated life expectancy provided that certain maintenance and rehabilitation work is done. In such cases, replacement of the asset would be deferred to a later date than projected in this study. The reverse is also true where problematic assets may need to be replaced earlier than expected. An example of this is the Innisfil Heights Watermain Replacement which is included in the 2015 Capital Budget at a value of $8.0 million. This is a premature replacement that was required to meet current standards. Water Assets Total Replacement Costs Table 6-2: Asset Replacement Needs 2015 Asset Replacement Needs Amount to be Funded in Forecast Period Amount to be Funded Beyond Forecast Period Watermains $85,637,220 $2,343 $85,634,877 Hydrants $3,809,942 $2,818,868 $991,074 Valves $4,586,052 $22,446 $4,563,606 Wells $1,945,836 $1,870,086 $75,750 Pumping Stations $12,130,345 $0 $12,130,345 Reservoirs $9,635,274 $0 $9,635,274 Treatment Plant $60,298,143 $0 $60,298,143 Total Water Assets $178,042,812 $4,713,743 $173,329, DFA Infrastructure International Inc.

76 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, Capital Budget Requirements The future capital budget requirements are presented in Appendix E for the study period. This reflects the projects identified by the Town in their 2015 Capital Budget and 2016 to 2024 forecast, and the replacement of existing assets as they reach the end of their respective useful lives. Approximately $86.7 million in capital expenditure is required between 2015 and It should be noted that some of the projects identified in the Capital Budget Forecast include asset replacement. Therefore these projects were rationalized with the projected asset replacement needs to ensure that there was no duplication in the 17-year projection. There are also a number of growth related projects included in the forecast that are needed to service the anticipated residential and nonresidential growth in Innisfil, and the water needs of BWG. The two (2) most significant growth-related projects included are; The Innisfil Heights Transmission Watermain in 2017; and Water Treatment Plant- Phase 3Expansion in 2021 Appendix E also shows the projected sources of financing for the annual expenditures. Based on the rate design guiding principles noted in Section 3.3, capital financing will be mainly through cash from the capital reserve and developer contributions to partially fund the growth related projects noted above. Future debt financing is not considered at this time due to the Town s current debt load and available capacity. Debt financing and the reserve fund requirements are discussed in Sections 7.1 and 7.2, respectively. 7.1 Debt Financing Issuance of debt allows for financing to be available in the year the project is required and repayment occurs over the future years. This approach supports the principle of user pay in that the beneficiaries of the new asset pay for its use through the debt repayment. Financing from the capital reserve requires that sufficient funds be available in the reserve in the year the project is undertaken, through annual contributions to the reserve in prior years. Without debt or reserve financing, major rate increases or spikes would be required in the project year to raise sufficient funds to cover the project expenditures. However, as noted, financing future projects through debt is not considered at this time. It is expected that as the Town s circumstances change in the future debt financing may be considered at that time to offset reserve fund financing. 7.2 Reserve Fund Requirements There are four (4) capital related reserve funds identified for the purpose of the projections made for the study period: The Capital Reserve Fund; Water Treatment Plant Reserve (new in 2016 to begin contributions towards replacement of the Water Treatment Plant as per Agreement with BWG); Development Charges Reserve Fund; and The Asset Life Cycle Reserve Fund (recommended for 2016 to begin allocation of funds for asset replacement beyond 2031). Appendix F shows the projected continuity schedule for each reserve. These show the transfers to and from the respective reserves and the opening and closing balances. Reserves are assumed to earn 1.3% annual interest on 14 DFA Infrastructure International Inc.

77 Annual Balance ($) Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 balances. Operating reserve requirements are discussed in Section 8. These reserve continuity schedules are for illustrative and quantitative analysis only, not specifically required for accounting and financial purposes. Capital Reserve Fund The Capital Reserve Fund, which is one of the primary sources of financing for projects, has a projected negative balance at the end of 2015 of approximately $3.5 million (deficit). It is proposed that internal borrowing be provided from the Wastewater Capital Reserve sufficient to ensure that the Water Capital program can be completed over the forecast period (estimated at a maximum of $6.6M). The internal borrowing requirement would diminish over the years as sufficient funds in the Water Capital Reserve are available. Approximately $13.6 million in funding will be needed from this reserve between 2015 and Annual contributions to the Water Capital Reserve (to be raised through the water rates each year) over the next five (5) years are projected to be: 2015: $2,646,786; 2016: $2,687,451; 2017: $2,757,411; 2018: $2,723,791; and 2019: $2,715,385 As noted in Figure 7-1, the annual closing balance is projected to increase from approximately $(3.5) million deficit in 2015 to approximately $13.3 million by This level of contribution and expenditures would maintain reserve balances of 7% to 8% of the asset value which places the Town in a very good position to fund capital works during the 17-year period. Water Capital Reserve $16,000,000 $14,000,000 $12,000, $13,292,522 $10,000,000 $8,000,000 Year $6,000,000 $4,000,000 $2,000,000 $- $(2,000,000) $(4,000,000) $(6,000,000) $(3,475,544) 2019 $41,086 $1,819, Figure 7-1: Water Capital Reserve Closing Balance Projections ( ) 15 DFA Infrastructure International Inc.

78 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Water Treatment Plant Replacement Reserve Fund A water services agreement between Innisfil and BWG provides for each municipality to maintain separate reserve accounts for the replacement of water treatment assets. This agreement was subsequently amended based on a review by KPMG. Reserve contributions are based on contract capacity or drivers of capacity depending on the specific asset group. It is proposed that Innisfil s contributions be phased in over four (4) years commencing with a contribution of $211,482 in The annual contributions to the Water Treatment Plant Replacement Reserve (to be raised through the water rates each year) over the next five (5) years are projected to be: 2015: $0 2016: $211, : $422,963; 2018: $1,252,101; and 2019: $845,936 Contained within the above noted 2018 contribution is a $0.6 million payment from BWG. This payment reflects BWG s $3.9 million contribution towards the recovery of the Phase One Water Treatment Plant capital costs and is in keeping with Section (4) of the BWG/Innisfil Water Supply Second Amending Agreement. It should be noted that this amount has been netted against the $3.3 million owed by Innisfil to BWG for the funding of the Phase Two Water Treatment Plant Expansion. As noted in Figure 7-2, the annual closing balance is projected to increase to approximately $15.3 million by This level of available funding represents about a quarter of the current replacement value of the Water Treatment Plant assets and will put Innisfil in a good position for funding their eventual replacement. 16 DFA Infrastructure International Inc.

79 Annual Balance ($) Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 $18,000,000 $16,000,000 Water Treatment Plant Replacement Reserve $15,333, $14,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,804, $7,738, Year $2,000, $- $ Figure 7-2: Water Treatment Plant Replacement Reserve Closing Balance Projections ( ) Development Charges Reserve Fund Development Charges are fees imposed by the Town on new development and are the main source of funding for Innisfil s growth related capital program. Over $53 million is being provided from the Development Charges Reserve Fund towards funding growth related capital works over the forecast period. To ensure that sufficient funds are available to finance the growth related capital program it is assumed that the Town will arrange front-ended financing agreements to cash flow growth related funding needs over the forecast period. As such approximately $19.3 million in front-end financing is identified between the years It should be noted that failure to secure front-end financing would require the issuance of debt or cause a delay in some growth related projects. The Development Charges Reserve Fund (which includes funds from the Innisfil Heights Reserve Fund) has a projected negative balance in 2015 of ($2.9 million), increasing to $5.6 million by 2019, then dropping back to a negative balance of ($2.8 million) in This is the result of funding of several significant growth related projects in that year, including $15.7 million towards the Water Treatment Plant - Phase 3 Expansion. As detailed in Figure 7.3 the Development Charges Reserve balance increases to $26 million by The annual contributions to the Water Development Charge Reserve were provided by Town staff. It has been assumed that no growth related debt has been issued. Over the next five (5) years development charges collected are projected to be: 17 DFA Infrastructure International Inc.

80 Annual Balance ($) Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, : $3,961,440; 2016: $4,093,530; 2017: $4,178,160; 2018: $4,231,630; and 2019: $4,080,830 $30,000,000 $25,000,000 Water Development Charges Reserve 2031 $26,027,967 $20,000,000 $15,000,000 $10,000,000 $5,000,000 $ $(2,945,078) 2019 $5,631, $(2,788,855) $(5,000,000) Year $(10,000,000) Figure 7-3: Water Development Charges Reserve Closing Balance Projections ( ) Asset Life Cycle Reserve Fund This reserve fund is recommended for 2016 and is intended to facilitate building a reserve over the next 17 years to fund asset replacement beyond Contributions to this reserve fund would begin in 2020 and be phased in to reduce the impacts to the revenue required from rates. Contributions to the Capital Reserve Fund will decrease after 2019, as noted in Appendix F, at which time the contributions to Asset Life Cycle Reserve Fund would begin. It should be noted that the Asset Life Cycle Reserve Fund contributions do not apply to water treatment asset replacement, as these will be funded from the Water Treatment Plant Replacement Reserve Fund as discussed above. No expenditures are projected from this reserve fund over the next 17 years because it is intended to finance asset replacement projects beyond Annual contributions of approximately $2.6 million in 2020, increasing to approximately $4.3 million by 2031 are projected. The annual closing balance is projected to increase from approximately $0 in 2019 to approximately $43.0 million by 2031(as noted in Figure 7-4). This represents approximately 40% of the total (non-treatment plant) asset replacement requirements beyond 2031 (refer to Section 6) and would place the Town in a reasonable position to fund replacement of its assets after DFA Infrastructure International Inc.

81 Annual Balance ($) Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 $50,000,000 $45,000,000 $40,000,000 $35,000,000 $30,000,000 Water Asset Replacement (>17 Years) Reserve Required to Finance Asset Renewal Beyond $42,954,685 $25,000,000 $20,000,000 $15,000, $15,124,004 $10,000,000 Year $5,000,000 $ $0 $ Figure 7-4: Asset Life Cycle Reserve Fund (for Asset Replacement Beyond 2031) ) 8 Operations & Maintenance (O&M) Cost Projections The annual operating budget is based on the operations and maintenance needs of the water system which includes costs related to water treatment, distribution, metering and hydrants. These costs generally include the staffing, materials, utilities and other costs related to the following: Administration; Well Systems Supply & Distribution; Lakeshore Water System Supply & Distribution; BWG Watermain & Booster Station; and Fleet. Transfers to capital related reserves are typically included in the annual O&M budgets. These costs however are addressed separately for the purposes of the rate study and noted in Section 8.2. Transfers to a rate stabilization reserve are also included in the O&M budget as discussed later in this section. A portion of these O&M costs is offset by non-rate revenues. These generally include: Penalties and late payment charges; Administrative service fees and charges; 19 DFA Infrastructure International Inc.

82 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Bulk water services revenues; Cookstown Tower Rental Income; Revenue from BWG for the supply of water; and Government grants (when available). The projection of the gross costs and non-rate revenues over the study period is based on the Town s 2015 Operating Budget. The assumptions used in arriving at these projections are as follows: 2016 and 2017 values are based on the Town s operating budget forecast; 2018 and beyond, O&M costs (not including non-recurring costs and reserve transfers) will increase annually by 2%; In addition to inflationary increases, Hydro and Chemicals (variable costs) will increase by the percent increase in water consumption; No grants would be available to offset costs; and 2018 and beyond, recurring non-rate revenues will increase annually by 2%. The projection of revenue from BWG is based on the Town s formula and calculations in its 2015 budget projections up to The calculations used are consistent with the terms and conditions of Innisfil / BWG Water Supply Agreement respecting payment by BWG. Beyond 2017, the BWG revenues are increased by 2% annually. Appendix G summarizes the gross operating costs, non-rate revenues and net costs to be recovered from users through the Town's base and consumption charges. The gross annual O&M costs are expected to increase from approximately $5.1 million in 2015 to $12.2 million by Rate Stabilization Reserve The Rate Stabilization Reserve is recommended for The establishment of a Rate Stabilization Reserve is considered a best practice and is required to provide a source of funding to offset any year-end operating deficits that may occur during the period and avoid rate increases ( spikes ) in the subsequent year. The annual contributions (to be raised through the water rates each year) should be based on maintaining a balance of between 1.5% and 2% of total annual operating costs. A contribution of $31,528 is required to offset a projected deficit in Thereafter annual contributions of $15,000 are made so that by 2031 the minimum balance of $225,000, or 1.5% annual operating costs is achieved. The reserve annual closing balances are as shown in Figure DFA Infrastructure International Inc.

83 Annual Balance ($) Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 $250,000 $200,000 $150,000 Water Rate Stabilization Reserve 2024 $120, $225,001 $100,000 $50, $(31,528) 2019 $45,000 $ Year $(50,000) Figure 8-1: Rate Stabilization Reserve 9 Full Cost of Water The cost of managing the Town s water systems over the next 17 years is reflected below in Figure 9-1. Table 9-1 is a summary of the projected gross costs for all the water system cost components over the study period. It shows the annual average cost of approximately $9.4 million to manage the water system over the next 17 years. This is equivalent to a unit cost of $4.34 per cubic metre per year based on an average consumption of 2,172,089 m 3 per year over the period. These annual costs reflect the average annual revenue requirements for the water system to be recovered from non-rate revenue sources and the water rates. Table 9-1: Average Annual Full Cost of Managing the Water System Cost Component Average Annual Cost % $/m3 Capital Reserve Contributions $ 2,120, % $ 0.98 Asset Life Cycle Reserve Contributions (>17 years) $ 3,108, % $ 1.43 Operating Reserve Contributions $ 15, % $ 0.01 O&M $ 4,141, % $ 1.91 Debt Repayment $ 40, % $ 0.02 Average Annual Cost $ 9,425, % $ DFA Infrastructure International Inc.

84 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Annual Water Costs ($) $14,000,000 $12,000, = $5,137, = $6,255,368, 2024 = $8, = $12,162,207 Note: No New Debt Assumed $10,000,000 $8,000,000 $6,000,000 Asset Renewal < 17 Yrs Funding for Asset Renewal > 17 Yrs $4,000,000 Capital $2,000,000 Year $- Operations Figure 9-1: Annual Water Costs 10 Evaluation of Rate Structure Options This section evaluates four (4) rate structure options that were identified in the qualitative analysis contained in Appendix B. Future rates necessary to meet the water revenue requirements (i.e. to recover the full cost of managing the water systems based on the assessment of system costs completed in the study) are calculated and compared for each option. As well, the customer impact of the rate structure options are also calculated and compared. A preferred rate structure option and rates are then recommended. It should be noted that all four (4) rate structure options that are considered for further analysis include the following two components: A Base Charge per Customer. This is a fixed charge to customers regardless of consumption. Higher charges apply to non-residential customers due to their respective water service and meter size (i.e. available capacity to these customers). This base charge structure is consistent with the American Water Works Association (AWWA) recommended concept for base charges now being adopted by many Ontario municipalities; and A Consumption Rate. This is a charge per cubic metre that applies to the volumes of water consumed as metered by the Town. 22 DFA Infrastructure International Inc.

85 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, Rate Structure Options Based on the qualitative analysis contained in Appendix B the following four (4) rate structure options are given further consideration for analysis: Option1: Uniform Base Option - This option is the current structure used by the Town to recover water costs and will be used as the Base Option against which all other options will be evaluated. Option 2: Increasing Block (All Users Year Round) This conservation-oriented rate structure option increases the economic incentive for conservation. It is intended as an economic incentive to encourage users to conserve water thereby deferring the need to increase system capacity. A two-block structure is considered, with the second block rate set a premium of 50% over the first block rate, and at a consumption level above 25m 3. The 25m 3 threshold will allow for the majority of essential water use to fall within the first block, and as such the higher second block will apply to discretionary water use only. As detailed in the Table 10.1, based on the average 2013 and 2014 monthly water consumption patterns approximately 20% of total annual consumption is expected to fall within the second block under this option. Table 10-1: Total Consumption Above Threshold Total (2013 and 2014 Average) Monthly Consumption above 25m 3 per month Threshold Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Consumption m 3 21,061 21,282 19,233 16,761 19,829 33,621 36,359 41,321 36,058 22,926 23,482 16, ,422 Total (2013 and 2014 Average) Monthly Consumption Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Consumption m 3 143, , , , , , , , , , , ,025 1,572,734 Percent of Monthly Consumption Above Threshold Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Consumption m 3 15% 17% 17% 16% 17% 22% 24% 26% 24% 19% 18% 15% 20% Option 3: Increasing Block (Residential Users Only Year Round) This conservation-oriented rate structure option is the same as Option 2 but applies only to residential customers as they are deemed to be the drivers of peak demand. This rationale is based on the following: - Residential consumption accounts for approximately 90% of the total consumption; and - Non-residential consumption being reasonably consistent throughout the year. This option also gives consideration to the principles of Fairness and Industry Promotion where the Town may wish to support economic growth by providing incentives in the rate structure. As detailed in Table 10.2, based on the average 2013 and 2014 monthly water consumption patterns, approximately 9% of total water consumption is expected to fall within the second block under this option. 23 DFA Infrastructure International Inc.

86 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Table 10-2: Residential Consumption Above Threshold Residential (2013 and 2014 Average) Monthly Consumption above 25m 3 per month Threshold Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Consumption m 3 9,323 9,444 7,905 6,041 7,586 18,697 19,130 25,803 18,325 9,644 10,171 6, ,528 Total (2013 and 2014 Average) Monthly Consumption Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Consumption m 3 143, , , , , , , , , , , ,025 1,572,734 Percent of Monthly Consumption Above Threshold Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Consumption m 3 6% 7% 7% 6% 6% 12% 13% 16% 12% 8% 8% 6% 9% Option 4: Excessive Use Charge (Residential Users Only During Peak Demand June to September). This conservation-oriented rate structure option is similar to Option 3 but applies only to the peak demand period. It will not adversely impact low water volume users where consumption is for essential needs and therefore cannot be adjusted. The Excessive Use Charge is intended to provide an incentive for residential users to reduce excess consumption during the peak demand period. As detailed in Table 10.3 the average 2013 and 2014 monthly water consumption pattern, peak demand is expected to occur within the four (4) months of June to September. The second block represents approximately 5% of total annual water consumption under this option. The second block threshold also attempts to be consistent with the Town s Water Conservation and Efficiency Strategy objectives by targeting a consumption reduction of 10% during the peak months. It is assumed that on any given day during the peak demand months a reduction of approximately 750m3/ day (i.e. 10% of peak demand for the Lakeshore WTP) would be targeted. This translates into a monthly volume of approximately 22,500 m 3 during the peak months. As noted in Table 10.3 this volume is consistent with the second block volume for the peak months. Table 10-3: Seasonal Consumption Above Threshold Seasonal (2013 and 2014 Average) Monthly Consumption above 25m 3 per month Threshold Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Seasonal Only Consumption m 3 9,323 9,444 7,905 6,041 7,586 18,697 19,130 25,803 18,325 9,644 10,171 6,458 81,955 Total (2013 and 2014 Average) Monthly Consumption Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Consumption m 3 143, , , , , , , , , , , ,025 1,572,734 Percent of Monthly Consumption Above Threshold Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Consumption m 3 6% 7% 7% 6% 6% 12% 13% 16% 12% 8% 8% 6% 5% 10.2 Proposed Water Base Charges The first component of each rate structure option considered is the Water Base Charge. The proposed base charge for each class of customer remains the same for each rate structure option, ensuring that the proportion of total water costs to be recovered from base charges and volumetric charges remained the same among all options. The current split of total cost recovered from base/volumetric charges stands at a ratio of 39/61. This ratio increases to 44/56 over the forecast period, thereby increasing the amount of total water costs recovered from base charge revenues, and increasing the security of water revenue. 24 DFA Infrastructure International Inc.

87 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Table 10.4 provides a schedule of proposed base charges by class of customer for the years Appendix H contains the proposed base charges for the entire forecast period To ensure sufficient funds are raised thru the base charge component, and to increase the proportion of total water revenue generated from the base charge, there is required to be an 8% increase in 2016 base charges, with a 5% increase in 2017, 4% in 2018, 3% increase in 2019, 2% increase in 2020 and a 1% in Thereafter the base charges for each class of customer remains stable over the balance of the forecast period to Table 10-4: Proposed Base charge By Customer Class Proposed Base Charges by Class for the Years Customer Class Annual % Increase 8.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Residential $ $ $ $ $ $ $ $ Commercial $ $ $ $ $ $ $ $ Industrial $ $ $1, $1, $1, $1, $1, $1, Institutional $2, $2, $2, $2, $2, $2, $2, $2, Proposed Consumption Water Rates By Rate Structure Option The second component of each rate structure option is the Consumption Rate. Similar to the Base Charge, each Consumption Water Rate Structure Option is revenue neutral in that total Consumption Rate revenues will not differ among the rate structure options. However, unlike the Base Charge, Consumptive Rates will vary by rate structure option, as will the burden of Consumption Rate revenues borne by each customer class. Customer impacts are discussed in greater detail in Section Table 10.5 provides a schedule of projected Consumption Water Rates by Rate Structure Option for the period of Appendix I contains the projected Consumption Water Rates by Rate Structure Option for the full forecast period Option 1 Uniform Rate-Status Quo is the current rate structure used by the town and as such is used as the Base Option by which the other rate structure options will be compared. Under the Base Option, the proposed consumption water rate increases to $2.08m 3 or 9% in 2016, and to $2.14m 3 or a 3% increase in It should be noted that the respective consumption rates increases for all rate structure options allow for a reduction in the proportion of total water revenue generated from the consumption rate. As noted previously, 61% of total water revenues are currently generated from the consumption rate. By 2031 this is reduced to 56%, thereby providing less risk to water revenue caused by consumption variability. No further consumption rate increases are required over the balance of the forecast period to As the Base Option does not include a higher second block, second block revenue risk (the increased risk of loss of revenue due to a reduction in consumption that would fall within the second block) is not a factor. Option 2 Increasing Block (All Users Year Round) is a two-block structure with the second block rate set a premium of 50% over the first block rate, and at a consumption level above 25m 3. The 25m 3 threshold will allow for the majority of essential water use to fall within the first block, and as such the higher second block will apply to discretionary water use only. When compared to the Base Option, Option 2 allows for a significantly smaller increase in the proposed first block consumption water rate with a rate of $1.93/m3, or a 1% increase in 2016, and a rate of $2.00/m 3, or a 4% increase in 2017, with further increases of 1% in both 2018 and 2019, for rates of $2.02/m 3 and $2.05/m 3 respectively. No further rate increases are required over the balance of the forecast period to Option 2 provides an economic incentive to encourage user to conserve water thereby defer the need to increase system capacity. Option 2 however provides for the greatest second block revenue risk as 20% of consumption is assumed to fall 25 DFA Infrastructure International Inc.

88 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 within the second block. Should consumption in the second block be lower than forecast, this Option provides the greatest risk of a water revenue shortfall. Option 3 Increasing Block (Residential Users Only Year Round) is the same as Option 2, however the second block rate will only apply to residential customers as they are deemed to be the drivers of peak demand. Option 3 also gives consideration to the principles of Fairness and Industry Promotion as consumption for non-residential customers are not subject to the higher second block rate. When compared to the Base Option, Option 3 allows for a slightly lower increase in 2016 with a proposed consumption water rate of $2.02.m 3 or increase of 6%, and a slightly higher increase of 4% increase in 2017 for a rate of $2.10/m 3 and a 1% increase in 2018 for a rate of $2.12/m 3, with no further increases required over the balance of the forecast period to Option 3 also provides for a second block revenue risk, but not to the same extent as Option 2 as only 9% of consumption is assumed to fall within the second block. Option 4 Excessive Use Charge (Residential Users Only During Peak Demand June to September) is similar to Option 3. However the second block rate will only apply residential customers during the peak demand period. Option 4 is intended to provide an incentive for residential customers to reduce excess consumption during the peak demand period (which is expected to fall within the Months of June to September). When compared to the Base Option, Option 4 allows for slightly lower increase in 2016 of 7% for a rate of $2.04/m 3, with the same increase of 3% increase in 2017 for a rate of $2.11/m 3, and a rate increase of 1% in 2018 for a rate of $2.12.m 3. No further consumption rate increases are required over the balance of the forecast period to Option 4 provides for the lowest second block revenue risk of the conservation-oriented rate structures as only 5% of consumption is assumed to fall within the second block. Table 10-5: Proposed Consumption Water Rates for the Years Projected Consumption Water Rates for the Years Option Description Annual % Increase 9.0% 3.0% 0.0% 0.0% 0.0% 0.0% 0.0% Option 1 UNIFORM RATE $1.91 $2.08 $2.14 $2.14 $2.14 $2.14 $2.14 $2.14 INCREASING BLOCK RATE (All Users Year Round) Option 2 Annual % Increase 1.0% 4.0% 1.0% 1.0% 0.0% 0.0% 0.0% Block 1 (80% of consumption) $1.91 $1.93 $2.00 $2.02 $2.05 $2.05 $2.05 $2.05 Block 2 (20% of consumption) $2.89 $3.01 $3.04 $3.07 $3.07 $3.08 $3.08 Option 3 Option 4 INCREASING BLOCK RATE (Residential Users Only Year Round) Annual % Increase 6.0% 4.0% 1.0% 0.0% 0.0% 0.0% 0.0% Block 1 (91% of consumption) $1.91 $2.02 $2.10 $2.12 $2.12 $2.12 $2.12 $2.12 Block 2 (9% of consumption) $3.03 $3.15 $3.17 $3.18 $3.18 $3.18 $3.18 EXCESSIVE USE CHARGE (Residential Users Only During Peak Demand-June to September) Annual % Increase 7.0% 3.0% 1.0% 0.0% 0.0% 0.0% 0.0% Block 1 (95% of consumption) $1.91 $2.04 $2.11 $2.12 $2.12 $2.12 $2.12 $2.12 Block 2 (5% of consumption) $3.06 $3.16 $3.17 $3.18 $3.18 $3.18 $ DFA Infrastructure International Inc.

89 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, Customer Impacts The impacts that the projected water rates and charges presented in Subsection 10.2 are calculated by customer class for each of the four (4) rate structure options. Customer impacts for the Residential, Commercial/Industrial and Institutional classes for the years are shown in tables 10-6 thru 10-8 respectively. Table 10-9 provides the changes in impact, by average customer, that conservation-oriented Options 2 thru 4 have over the Base Option (Option 1) Residential Customer Impacts Residential customer impacts for each rate structure option are presented in Table 10.6 for the years Appendix J contains the projected residential customer impacts for the entire forecast period The residential customer impacts displayed in Table 10.6 represents projected annual residential customer water bills based on an average residential water consumption of 174 cubic meters per year. It is assumed that any proposed new rate structure would commence in 2016, as such 2015 impacts are the same for all options since they reflect the current uniform rate structure employed by the Town. As can be seen in Table 10.6, projected residential water bills will vary by Rate Structure Option. This is the result of shifts in water cost burden to the non-residential classes of water customer, as well as shifts in water cost burden to high residential water consumers (residential water customers where consumption exceed 25m 3 /month) For the average residential water customer, Option 2 provides the lowest cost option, with the Base Option (Current Uniform Rate Structure) providing the highest. Option 2 provides the lowest cost option for the residential class due to the large volume of water consumption that falls under the higher second block, of which the majority belongs to non-residential customers. Because of the large shift in water cost burden to the nonresidential classes, it can be viewed that under Option 2, non-residential customers are to a certain extent subsiding the residential class of water customer. 27 DFA Infrastructure International Inc.

90 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Annual Base Charge Option 1 (Constant Rate) Table 10-6: Residential Customer Impacts for the Years Residential Customer Impacts for the Years $222 $240 $252 $262 $270 $275 $278 $278 Annual Consumptive Charge $332 $362 $373 $373 $373 $373 $373 $373 Total Annual Residential Bill (Option 1) $555 $602 $625 $635 $643 $648 $651 $651 Annual Bill Increase ($) $16 $48 $23 $10 $8 $5 $3 $0 Annual Bill Increase (%) 3.1% 8.6% 3.8% 1.6% 1.2% 0.8% 0.4% 0.0% Option 2 (Increasing Block) Annual Base Charge $222 $240 $252 $262 $270 $275 $278 $278 Annual Consumptive Charge $332 $335 $349 $352 $356 $356 $357 $357 Total Annual Residential Bill (Option 2) $555 $575 $601 $614 $626 $632 $635 $635 Annual Bill Increase ($) $16 $21 $25 $14 $12 $6 $3 $0 Annual Bill Increase (%) 3.1% 3.8% 4.4% 2.3% 1.9% 0.9% 0.5% 0.1% Option 3 (Increasing Block -Residential Only) Annual Base Charge $222 $240 $252 $262 $270 $275 $278 $278 Annual Consumptive Charge $332 $351 $365 $368 $369 $369 $369 $369 Total Annual Residential Bill (Option 3) $555 $591 $617 $630 $639 $645 $647 $647 Annual Bill Increase ($) $16 $37 $26 $13 $9 $5 $3 $0 Annual Bill Increase (%) 3.1% 6.6% 4.3% 2.1% 1.4% 0.8% 0.4% 0.0% Option 4 (Excessive Use Charge) Annual Base Charge $222 $240 $252 $262 $270 $275 $278 $278 Annual Consumptive Charge $332 $355 $367 $368 $369 $369 $369 $369 Total Annual Residential Bill (Option 4) $555 $595 $619 $630 $639 $645 $647 $647 Annual Bill Increase ($) $16 $41 $24 $11 $9 $5 $3 $0 Annual Bill Increase (%) 3.1% 7.3% 4.0% 1.8% 1.4% 0.8% 0.4% 0.0% Summary of Residential Customer Annual Wate Option 1 (Constant Rate) $555 $602 $625 $635 $643 $648 $651 $651 Option 2 (Increasing Block) $555 $575 $601 $614 $626 $632 $635 $635 Option 3 (Increasing Block -Residential Only) $555 $591 $617 $630 $639 $645 $647 $647 Option 4 (Excessive Use Charge) $555 $595 $619 $630 $639 $645 $647 $ Commercial Customer Impacts Commercial customer impacts for the years for each rate structure option is presented in Table Appendix K contains the projected commercial customer impacts for the entire forecast period The commercial customer impacts displayed in Table 10.7 represents projected annual commercial customer water bills based on a blended average commercial/industrial water consumption of 800 cubic meters per year. As previously mentioned, it is assumed that any proposed new rate structure would commence in 2016, therefore 2015 impacts are the same for all options as they reflect the current uniform rate structure employed by the Town. As can be seen in Table 10.7, projected commercial water bills will vary by Rate Structure Option. This is the result of shifts in water cost burden to the non-residential classes (including the commercial class), and to a lesser extent, shifts in water cost burden to high residential water consumers. For the average commercial water customer, Option 2 provides the highest cost option as the higher average commercial customer volumes will shift a large portion of the water cost burden away from the residential class and onto the commercial class. Option 3 would provide the lowest cost options for the commercial class as there is a shift in water cost burden to high residential water consumers that are subject to the higher second block water rate. Option 4 also provides a favourable cost option for the average commercial water customer, but not to the same extent as Option 3. Under Option 4 the higher block two water rate is only applied to excessive residential water consumption occurring during peak months, and not excessive residential consumption occurring throughout the year as found under Option DFA Infrastructure International Inc.

91 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Annual Base Charge Table 10-7: Commercial Customer Impacts for the Years Commercial Customer Impacts for the Years Option 1 (Constant Rate) $397 $428 $450 $468 $482 $491 $496 $496 Annual Consumptive Charge $1,528 $1,666 $1,715 $1,715 $1,715 $1,715 $1,715 $1,715 Total Annual Commercial/Industrial Bill (Option 1) $1,925 $2,094 $2,165 $2,183 $2,197 $2,207 $2,212 $2,212 Annual Bill Increase ($) $29 $169 $71 $18 $14 $10 $5 $0 Annual Bill Increase (%) 1.6% 8.8% 3.4% 0.8% 0.6% 0.4% 0.2% 0.0% Option 2 (Increasing Block) Annual Base Charge $397 $428 $450 $468 $482 $491 $496 $496 Annual Consumptive Charge $1,528 $2,024 $2,105 $2,126 $2,149 $2,151 $2,154 $2,157 Total Annual Commercial/Industrial Bill (Option 2) $1,925 $2,452 $2,554 $2,594 $2,630 $2,643 $2,650 $2,653 Annual Bill Increase ($) $29 $528 $102 $39 $37 $12 $8 $3 Annual Bill Increase (%) 1.6% 27.4% 4.1% 1.5% 1.4% 0.5% 0.3% 0.1% Option 3 (Increasing Block -Residential Only) Annual Base Charge $397 $428 $450 $468 $482 $491 $496 $496 Annual Consumptive Charge $1,528 $1,615 $1,678 $1,692 $1,698 $1,698 $1,698 $1,698 Total Annual Commercial/Industrial Bill (Option 3) $1,925 $2,044 $2,127 $2,160 $2,180 $2,189 $2,194 $2,194 Annual Bill Increase ($) $29 $119 $84 $33 $20 $10 $5 $0 Annual Bill Increase (%) 1.6% 6.2% 4.1% 1.5% 0.9% 0.4% 0.2% 0.0% Option 4 (Excessive Use Charge) Annual Base Charge $397 $428 $450 $468 $482 $491 $496 $496 Annual Consumptive Charge $1,528 $1,633 $1,687 $1,692 $1,698 $1,698 $1,698 $1,698 Total Annual Commercial/Industrial Bill (Option 4) $1,925 $2,061 $2,137 $2,160 $2,180 $2,189 $2,194 $2,194 Annual Bill Increase ($) $29 $136 $76 $23 $20 $10 $5 $0 Annual Bill Increase (%) 1.6% 7.1% 3.7% 1.1% 0.9% 0.5% 0.2% 0.0% Summary of Commercial/Industrial Customer Annual Water Charge Option 1 (Constant Rate) $1,925 $2,094 $2,165 $2,183 $2,197 $2,207 $2,212 $2,212 Option 2 (Increasing Block) $1,925 $2,452 $2,554 $2,594 $2,630 $2,643 $2,650 $2,653 Option 3 (Increasing Block -Residential Only) $1,925 $2,044 $2,127 $2,160 $2,180 $2,189 $2,194 $2,194 Option 4 (Excessive Use Charge) $1,925 $2,061 $2,137 $2,160 $2,180 $2,189 $2,194 $2, Institutional Customer Impacts Institutional customer impacts for each rate structure option is presented in Table 10.8 for the years Appendix L contains the projected institutional customer impacts for the entire forecast period The institutional customer impacts displayed in Table 10.8 represents projected annual institutional customer water bills based on an average institutional water consumption of 4,250 cubic meters per year. Again, it is assumed that any proposed new rate structure would commence in 2016, as such 2015 impacts are the same for all options as they reflect the current uniform rate structure employed by the Town. As can be seen in Table 10.8, projected institutional water bills will vary by Rate Structure Option. Identical to the commercial customer analysis discussed above, institutional water bills will vary as a result of shifts in water cost burden to the institutional class, and to a lesser extent shifts in water cost burden to high residential water consumers. For the average institutional water customer Option 2 provides the highest cost option as the higher average institutional customer volumes will shift a large portion of the water cost burden away from the residential class and onto the institutional class. Option 3 would provide the lowest cost options for the institutional class as there is a shift in water cost burden to high residential water consumers that are subject to the higher second block water rate. Option 4 also provides a favourable cost option for the average institutional water customer, but not to the same extent as Option 3. Under Option 4 the higher block two water rate is only applied to excessive residential water consumption occurring during peak months, and not excessive residential consumption occurring throughout the year as found under Option DFA Infrastructure International Inc.

92 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Annual Base Charge Option 1 (Constant Rate) Table 10-8: Institutional Customer Impacts for the Years $2,312 $2,497 $2,622 $2,727 $2,809 $2,865 $2,894 $2,894 Annual Consumptive Charge $8,118 $8,848 $9,114 $9,114 $9,114 $9,114 $9,114 $9,114 Total Annual Institutional Bill (Option 1) $10,430 $11,345 $11,736 $11,841 $11,922 $11,979 $12,007 $12,007 Annual Bill Increase ($) $171 $916 $390 $105 $82 $56 $29 $0 Annual Bill Increase (%) 1.7% 8.8% 3.4% 0.9% 0.7% 0.5% 0.2% 0.0% Option 2 (Increasing Block) Annual Base Charge $2,312 $2,497 $2,622 $2,727 $2,809 $2,865 $2,894 $2,894 Annual Consumptive Charge $8,118 $12,000 $12,477 $12,603 $12,738 $12,753 $12,770 $12,786 Total Annual Institutional Bill (Option 2) $10,430 $14,498 $15,099 $15,330 $15,547 $15,618 $15,664 $15,680 Annual Bill Increase ($) $171 $4,068 $601 $231 $217 $72 $46 $16 Annual Bill Increase (%) 1.7% 39.0% 4.1% 1.5% 1.4% 0.5% 0.3% 0.1% Option 3 (Increasing Block -Residential Only) Annual Base Charge $2,312 $2,497 $2,622 $2,727 $2,809 $2,865 $2,894 $2,894 Annual Consumptive Charge $8,118 $8,581 $8,913 $8,990 $9,021 $9,020 $9,020 $9,020 Total Annual Institutional Bill (Option 3) 10,430 11,078 11,535 11,717 11,830 11,886 11,914 11,913 Annual Bill Increase ($) Annual Bill Increase (%) 1.7% 6.2% 4.1% 1.6% 1.0% 0.5% 0.2% 0.0% Option 4 (Excessive Use Charge) Institutional Customer Impacts for the Years Annual Base Charge 2,312 2,497 2,622 2,727 2,809 2,865 2,894 2,894 Annual Consumptive Charge 8,118 8,673 8,961 8,990 9,021 9,020 9,020 9,020 Total Annual Institutional Bill (Option 4) 10,430 11,171 11,583 11,717 11,830 11,886 11,914 11,913 Annual Bill Increase ($) Annual Bill Increase (%) 1.7% 7.1% 3.7% 1.2% 1.0% 0.5% 0.2% 0.0% Summary of Institutional Customer Annual Water Charge Option 1 (Constant Rate) $10,430 $11,345 $11,736 $11,841 $11,922 $11,979 $12,007 $12,007 Option 2 (Increasing Block) $10,430 $14,498 $15,099 $15,330 $15,547 $15,618 $15,664 $15,680 Option 3 (Increasing Block -Residential Only) $10,430 $11,078 $11,535 $11,717 $11,830 $11,886 $11,914 $11,913 Option 4 (Excessive Use Charge) $10,430 $11,171 $11,583 $11,717 $11,830 $11,886 $11,914 $11, Average Customer Bill Impact To show the impact that the three (3) conservation-oriented rate structure options have on an average customer water bill, Table 10.9 compares Rate Structure Option 2 thru 4 to the Base Option for the years by providing the incremental change on projected average customer water bills. Appendix M contains the projected average customer bill impact for the entire forecast period Comparing Option 2 to the Base Option - the average residential customer water bill will fall modestly, whereas the average water bill for both the commercial and institutional customer will increase significantly. This is due to the higher average water consumption volumes of commercial and institutional customers that, under Option 2, would be subject to the higher second block water rate. As noted previously, under Option 2, non-residential customers are seen as subsiding the residential class of water customer. Comparing Option 3 to the Base Option - all the average customer (residential, commercial and institutional) water bills will fall. This is the result of the shift of water cost burden to the high residential water consumers (residential water consumers where monthly consumption exceed 25m 3 /month). Nonresidential customer are no longer seen as subsiding the residential class of water customer. Comparing Option 4 to the Base Option - similar to Option 3, all average customer (residential, commercial and institutional) water bills will fall, but not to the same extent as under Option 3. The shift 30 DFA Infrastructure International Inc.

93 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 of water cost burden to the high residential water consumers is limited to the excessive residential water consumption occurring during peak months, and not excessive residential consumption occurring throughout the year as found under Option 3. Table 10-9: Customer Impact Over Base Option for the Years Customer Impact over Base Option - Option 2 (Increasing Block) Customer Class Residential $0 ($27) ($24) ($21) ($17) ($17) ($16) ($16) Commercial/Industrial $0 $359 $389 $410 $433 $436 $439 $441 Institutional $0 $3,152 $3,363 $3,489 $3,624 $3,639 $3,657 $3,673 Customer Impact over Base Option - Option 3 (Increasing Block -Residential Only) Customer Class Residential $0 ($7) ($6) ($5) ($4) ($4) ($4) ($4) Commercial/Industrial $0 ($50) ($38) ($23) ($17) ($18) ($18) ($18) Institutional $0 ($267) ($201) ($124) ($93) ($93) ($93) ($94) Customer Impact over Base Option - Option 4 (Excessive Use Charge) Customer Class Residential $0 ($7) ($6) ($5) ($4) ($4) ($4) ($4) Commercial/Industrial $0 ($33) ($29) ($23) ($17) ($18) ($18) ($18) Institutional $0 ($175) ($153) ($124) ($93) ($93) ($93) ($94) 10.5 Preferred Rate Structure Option As noted previously, four (4) rate structure option were identified for further review. One (1) is the current rate structure (Base Option) employed by the town, and three (3) are conservation-oriented rate structures that were recommended in the Qualitative Analysis contained in Appendix B. Table provides a summary of the results of the Qualitative Analysis of the Rate Structure Options. Table 10-10: Summary of Qualitative Analysis of Rate Structure Options Summary of Qualitative Analysis of Rate Structure Options Option 1 Option 2 Option 3 Option 4 Guiding Principle Base Option Increasing Block (All Users Year Round) Increasing Block (Residential Users Only Year Round) Excessive Use Charge (Residential Users Only During Peak Demand) Full Cost Recovery Reduce Wasteful Uses of Water Fairness and Reasonableness (avoid discriminaiton) Ease of Adminstration Stability Industry Promotion Future Debt to be Avoided Full Cost Recovery - All rate structure options are designed to sustain adequate financing to recover the full costs of supplying and distributing drinking water to Town customers. Reduce Wasteful Uses of Water All rate structure options encourage customers to conserve water by way of the consumption rate. Option 2 thru 4 however are better designed by way of the higher second 31 DFA Infrastructure International Inc.

94 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 block rate component to encourage customers with discretionary water uses and with peak demands that are significantly higher than normal demands to reduce consumption. Fairness and Reasonableness (avoid discrimination) All rate structure options promote the principle of user-pay, which is a fair and reasonable approach to water cost recovery. However, Option 2, with a higher second block that applies to all users, can be seen as discriminating against large volume nonresidential water users that may not have the discretion to reduce water consumption. Ease of Administration The Base Option is the easiest rate structure option to administer as there would be no change in the status quo billing protocols. Options 2 and 3 would require changes to the water billing protocols as a second block would need to be added. Based on discussions with Innpower these changes would not be difficult as the current billing software allows for a two block structure. An outward facing communication strategy would be required to education water customers as to the purpose of the second block. Option 4 however would be more difficult to administer as decision as to when the second block would become active, and what water bills the higher second block rate would apply would need to be made and would be subject to disagreement. While Innpower confirmed a time-limited block two rate structure could be implemented, there would be challenges as to consistency in billing cycles and volumes subject to the two block structure. Stability All rate structures promote revenue stability to the extent of the base charge component revenues. However all conservation-oriented rate structure options have to varying degrees a second block revenue risk (the increased risk of loss of revenue due to a reduction in consumption that would fall within the second block) The second block revenue risk can be minimized however by conservatively projecting water consumption volumes when setting water rates. Industry Promotion Option 1, as the Base Option, can be seen as being neutral to promoting industry within Innisfil. Option 2 however can be seen as adversely impacting industry by subjecting nondiscretionary non-residential water consumption to the higher second block, thereby significantly increasing the average non-residential water bill as shown in Table Both Options 3 and 4 can be seem as promoting industry by having a lower than otherwise first block consumption rate. Future Debt to be Avoided All rate structures fund the Town s water system through rates and user charges. No debt is considered in financing future projects. As can be seen in Table 10-10, Option 3 meets all of the rate design guiding principles and as such would be viewed as the preferred rate structure option. Also, under Option 3, when considering impacts on the average water bill over the base option, all classes of water consumer will see a reduction in their average water bill as detailed in Table Only residential water consumers who use excessive amounts of water may see increases as a result of the higher second block charged on residential consumption. Option 3 increasing the economic incentive to conserve water and to reduce peak demands, which in turn will have a direct effect on the need to build system capacity, thereby meeting the objective of the Town s Water Conservation and Efficiency Strategy Projected Water Rates Based on the qualitative and quantitative analysis undertaken in this study Option 3 (Increasing Block (Residential Users Only Year Round) is recommended as the preferred water rate structure option to be used in calculating projected rates and charges. 32 DFA Infrastructure International Inc.

95 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 The projected water rates and charges for the study period required to recover the full cost of managing each water system are presented in Appendix N. The annual base charges for the period from 2015 to 2022 are shown in Table 10-11, with the projected consumption rates are shown in Table The projected annual rate increases are also shown. Table 10-11: Projected Base Charges ( ) Projected Base Charges for the Years Customer Class Annual % Increase 8.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Residential $ $ $ $ $ $ $ $ Commercial $ $ $ $ $ $ $ $ Industrial $ $ $1, $1, $1, $1, $1, $1, Institutional $2, $2, $2, $2, $2, $2, $2, $2, Table 10-12: Projected Consumption Water Rates ( ) Option Description Option 3 Projected Consumption Water Rates for the Years INCREASING BLOCK RATE (Residential Users Only Year Round) Annual % Increase 6.0% 4.0% 1.0% 0.0% 0.0% 0.0% 0.0% Block 1 Consumption Rate $1.91 $2.02 $2.10 $2.12 $2.12 $2.12 $2.12 $2.12 Block 2 Consumption Rate $3.03 $3.15 $3.17 $3.18 $3.18 $3.18 $ O.Reg 453/07 Water System Financial Plan No A 11.1 Financial Statements This financial plan involves the review, analysis and assessment of financial information contained in the rate study including costs, revenues, debt, cash transactions and Tangible Capital Assets (TCA) to prepare the following three (3) financial statements covering the period 2016 to 2021 as required under O.Reg. 453/07: Statement of Financial Position; Statement of Operations; and Statement of Cash Flow Statement of Financial Position The Statement of Financial Position is presented in Table This statement summarizes the Town s waterrelated financial and non-financial assets (Tangible Capital Assets TCA) and liabilities, and provides the net financial asset/ (net debt) position and accumulated surplus related to managing the water system. The financial assets are primarily cash balances in the water reserves and reserve funds. Liabilities consist of development charge reserve fund balances (i.e. deferred revenues) and outstanding long-term debt issued for the Town s water system. The non-financial assets (TCA) include the Town s water infrastructure and facilities. The historical costs are amortized over the asset life to arrive at the net book value each year from 2016 to New assets are added in 33 DFA Infrastructure International Inc.

96 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 the years acquired, developed or built. Contributed assets are primarily new infrastructure and facilities that would be transferred to the Town s ownership and control by developers as they are completed. It is assumed that other non-financial assets such as inventory and prepaid expenses are zero. Contained within the Statement of Financial Position are important indicators, the first being net financial assets (or net debt) which is defined as the difference between financial assets and liabilities. This indicator provides an indication of a water system's "future revenue requirement". Table 11.1 indicates that in 2016, the Town's water system will be in a net debt position of $9.5 million. This will grow to a net debt position of $13.9 million by The net debt position indicates that financial resources will be required to fund past operations. The increased net debt is due to a combination a slight increase in the cash position which is more than offset by an increase in liabilities mainly through an increase in outstanding long-term debt. The next important indicator contained in the Statement of Financial Position is the net book value of TCA. Table 11-1 shows that net TCA are expected to grow by $55.3 million over the forecast period, or from $120.7 million in 2016 to $176 million This indicates that the Town has plans to invest in significant tangible capital assets in excess of the consumption of existing assets. The largest investment will come in 2021 with the $22 million Phase 3 Expansion of the Lakeshore Water Treatment Plant. Further, a consumption ratio consisting of the accumulated amortization of the Town's TCA as a percent of historical cost ratio highlights the aged condition of the assets and their potential replacement needs. The Town's Water Asset Consumption Ratio stays fairly constant over the forecast period at 17% - 19% due to the weighting of new assets acquired or constructed. It should be noted that it is assumed in these statements that the Town will arrange a portion of development related funding through front-ended financing agreements to cash-flow the growth related funding needs over the forecast period. Failure to secure front-end financing would require the issuance of debt or cause a delay in some growth related projects Another important indicator in the Statement of Financial Position is the accumulated surplus. This indicator provides an indication of the resources available to the Town for managing its water system. The accumulated surplus is projected to increase from approximately $111.2 million in 2016 to approximately $162.0 million by The accumulated surplus is made up entirely from the net TCA balance representing past investments in the water systems infrastructure. 34 DFA Infrastructure International Inc.

97 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Table 11-1: Statement of Financial Position Financial Assets Cash,Receivables and Investment ($1,766,188) ($7,287,033) $59,653 $949,469 $2,502,309 ($1,225,997) Total Financial Assets ($1,766,188) ($7,287,033) $59,653 $949,469 $2,502,309 ($1,225,997) Financial Liabilities Accounts Payable & Deferred Revenue $1,145,684 ($688,596) $3,537,315 $5,850,429 $3,714,573 ($3,874,966) Long-term Liabilities $6,548,218 $6,412,900 $18,269,285 $17,728,006 $17,164,838 $16,578,889 Total Financial Liabilities $7,693,902 $5,724,304 $21,806,600 $23,578,435 $20,879,411 $12,703,923 Net Financial Assets (Net Debt) ($9,460,091) ($13,011,337) ($21,746,948) ($22,628,966) ($18,377,102) ($13,929,921) Non-Financial Assests Tangible Capital Assets $145,267,678 $157,824,526 $170,460,536 $176,116,174 $182,585,722 $213,230,671 Accumulated Amortization $24,597,274 $26,666,033 $28,901,580 $31,258,999 $34,578,531 $37,273,157 Total Non-Financial Assets $120,670,405 $131,158,493 $141,558,956 $144,857,175 $148,007,191 $175,957,514 Accumulated Surplus $111,210,314 $118,147,156 $119,812,009 $122,228,209 $129,630,089 $162,027,594 Financial Indicators Increase (Decrease) in Net Financial Assets $981,591 ($3,551,247) ($8,735,610) ($882,018) $4,251,864 $4,447,181 Increase (Decrease) in Net Tangible Capital Assets $327,044 $10,488,088 $10,400,463 $3,298,219 $3,150,016 $27,950,324 Increase (Decrease) in Accumulated Surplus $1,308,634 $6,936,841 $1,664,853 $2,416,200 $7,401,880 $32,397,505 Water Asset Consumption Ratio -17% -17% -17% -18% -19% -17% Statement of Operations The Statement of Operations is presented in Table It summarizes the annual revenues and expenses associated with managing the Town s water system. It provides a report on the transactions and events that have an influence on the accumulated surplus. The main revenue items included are: Revenues from Water Rate Charges ; Earned Revenues (earned development charges and capital contributions); and Other Revenues (administrative fees, bulk water revenues, water meter fees, etc) The main expense items are: The annual cost of operating and maintaining the water system,; and Amortization expenses on existing and added TCA. The operating surplus/ (deficit) is an important indicator contained in the Statement of Operations. An operating surplus/ (deficit) measures whether operating revenues generated in a year were sufficient to cover operating expenses incurred in that year. It is important to note that an annual surplus is necessary to ensure funds will be available to address non-expense items such as TCA acquisitions over and above amortization expenses, reserve/reserve fund contributions for asset replacement and rate stabilization, and repayment of outstanding debt principal. A ratio of operating surplus to total revenue has been calculated in Table 11-2 to reflect the percent of total revenue that can be allocated to funding these non-expense items. It should be noted however that certain years contain a large portion of the annual revenues that are derived from earned revenue sources which are not 35 DFA Infrastructure International Inc.

98 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 a cash item, and therefore are not available to address non-expense items. Cash generated from operations is discussed in the Statement of Cash Flows section. Table 11-2: Statement of Operations Water Revenue Rate Revenue $5,416,364 $5,759,305 $6,008,971 $6,255,368 $6,579,187 $6,893,419 Earned Revenue $717,620 $6,000,800 $48,310 $1,839,993 $6,542,387 $31,617,294 Other Revenue $1,393,034 $1,247,324 $1,889,750 $1,325,037 $1,400,613 $1,644,520 Total Revenues $7,527,018 $13,007,429 $7,947,031 $9,420,398 $14,522,187 $40,155,233 Water Expenses Gross $3,954,523 $3,792,420 $3,863,900 $3,936,809 $4,011,176 $4,418,255 Non-TCA Capital $10,200 $10,404 $0 $21,649 $9,937 $21,397 Operating Expenses $3,964,723 $3,802,824 $3,863,900 $3,958,457 $4,021,113 $4,439,652 Interest on Debt $310,401 $180,455 $163,148 $668,122 $646,232 $623,451 Amortization $1,981,027 $2,087,309 $2,255,130 $2,377,618 $2,452,962 $2,694,626 Total Expenses $6,256,150 $6,070,588 $6,282,178 $7,004,198 $7,120,307 $7,757,728 Annual Surplus/(Deficit) $1,270,867 $6,936,841 $1,664,853 $2,416,200 $7,401,880 $32,397,505 Accumulated Surplus/(Deficit), Beginning of Year $109,939,447 $111,210,314 $118,147,156 $119,812,009 $122,228,209 $129,630,089 Accumulated Surplus/ (Deficit), End of Year $111,210,314 $118,147,156 $119,812,009 $122,228,209 $129,630,089 $162,027,594 Financial Indicators Increase (Decrease) in Total Revenues ($774,186) $5,480,412 ($5,060,399) $1,473,367 $5,101,789 $25,633,046 Increase (Decrease) in Total Expenses $691,501 ($185,562) $211,590 $722,020 $116,109 $637,421 Increase (Decrease) in Annual Surplus ($1,465,687) $5,665,974 ($5,271,989) $751,347 $4,985,680 $24,995,625 Operating Surplus Ratio 16.9% 53.3% 20.9% 25.6% 51.0% 80.7% Statement of Cash Flow The Statement of Cash Flow is presented in Table This statement summarizes the main cash inflows and outflows related to the water system in four (4) main areas - operating, capital, investing and financing, and shows the annual changes in cash. The operating cash transactions begin with the surplus or deficit identified in the Statement of Operations. This figure is adjusted to add or subtract non-cash items that were included as revenues or expenses (e.g. amortization expenses). It is assumed that there were no investing activities over the period. The capital section indicates the amounts spent to acquire capital assets (TCA) or received from the sale of assets. In the Town s case, it is assumed that there are no assets to be sold to generate cash. The financing section identifies the funds received from frontend financing arrangements, long-term debt, development charges receipts, capital contributions from external sources and debenture proceeds as cash inflows, and the portion of debt repaid as cash outflows. It is expected that $12.0 million in debt will be incurred in 2018 for the Lakeshore Water Plant Expansion. Table 11-3 indicates that cash has been generated from operations, which is used in funding the acquisition of TCA, towards building internal reserves, and to repay debt over the forecast period. The Town's cash position is projected to increase slightly over the forecast period from a deficit of ($1.8) million in 2016 to a deficit of ($1.2) million in DFA Infrastructure International Inc.

99 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 Table 11-3: Statement of Cash Flow Cash Provided by: Operating Activities Annual Surplus/(Deficit) $1,270,867 $6,936,841 $1,664,853 $2,416,200 $7,401,880 $32,397,505 Non-Cash Items Amortization $1,981,027 $2,087,309 $2,255,130 $2,377,618 $2,452,962 $2,694,626 Earned Revenue ($717,620) ($6,000,800) ($48,310) ($1,839,993) ($6,542,387) ($31,617,294) Net Change in Cash Provided by Operating Activities $2,534,274 $3,023,350 $3,871,673 $2,953,826 $3,312,455 $3,474,837 Capital Activities Purchase of TCA $2,308,070 $12,575,397 $12,655,593 $5,675,837 $5,602,978 $30,644,949 Net Change in Cash Used in Capital Activities $2,308,070 $12,575,397 $12,655,593 $5,675,837 $5,602,978 $30,644,949 Financing Activities Front-End Financing $0 $0 $0 $0 $0 $13,070,654 DC Collections $4,105,429 $4,166,520 $4,274,222 $4,153,106 $4,396,396 $4,381,438 External Financing $484,500 $0 $0 $0 $10,135 $6,575,663 Proceeds From Long-Term Debt $0 $0 $12,000,000 $0 $0 $0 Repayment of Long-Term Debt ($130,172) ($135,318) ($143,615) ($541,279) ($563,168) ($585,949) Net Change in Cash Used in Financing Activities $4,459,757 $4,031,202 $16,130,607 $3,611,827 $3,843,363 $23,441,806 Net Change in Cash and Cash Equivalents $4,685,961 ($5,520,845) $7,346,686 $889,816 $1,552,840 ($3,728,306) Cash and Cash Equivalents, Beginning of the Year ($6,452,149) ($1,766,188) ($7,287,033) $59,653 $949,469 $2,502,309 Cash and Cash Equivalents, End of the Year ($1,766,188) ($7,287,033) $59,653 $949,469 $2,502,309 ($1,225,997) 11.2 Lead Service Pipe Removal Based on the information provided by the Town, there are no lead pipes to be replaced. Therefore the financial statements do not include costs associated with lead service pipe removal. 12 Conclusions & Recommendations The following are the main conclusions regarding the water system: The replacement value of the water system is estimated to be $178,042,812 in 2015 dollars (i.e. historical costs indexed to 2015) and the 2015 Net Book Value (NBV) is $111,779,796 (i.e. historical cost less accumulated depreciation); The water system assets as a whole 16% depreciated or have approximately 84% remaining life based on the TCA data; The asset replacement needs are approximately $4.7 million over the next 17 years. Approximately $173 million is required beyond 2031, primarily for replacement of linear assets; Approximately $86.7 million in capital expenditures is required between 2015 and Approximately $13.6 million in financing will be required from the Reserve Fund between 2015 and 2019; 37 DFA Infrastructure International Inc.

100 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 The annual capital reserve contributions (to be raised through the water rates each year) over the next five (5) years are projected to range between $2.6 million and $2.8 million from 2015 to Contribution to the Water Treatment Plant Replacement Reserve will commence in 2016 with a $0.2 million contribution, increasing annually to $0.8 million by 2019; The gross annual O&M costs (not including non-recurring costs and reserve transfers) are expected to increase from approximately $5.1 million in 2015 to $6.2 million by 2019 and up to $12.1 million by 2031; A contribution to the Operating Reserve Fund of $31,528 is required to offset a projected deficit in Thereafter annual contributions of $15,000 are made so that by 2031 the minimum balance of $225,000, or 1.5% annual operating costs is achieved. The full cost of managing the water system over the next 17 years is projected to be an annual average cost of $9.4 million. This is equivalent to a unit cost of $4.34 per cubic metre per year based on an average consumption of 2,127,089 m 3 per year over the period; Annual increases to the base charge over the next 6 years are projected to be 8% in 2016, 5% for 2017, 4% in 2018, 3% in 2019, 2% in 2020, and 1% in 2021; and The ratio of water revenue from the base charge to consumption rates currently stands 39/61, and projected to be 44/56 by The following are the main recommendations resulting from the water rate study and water system financial plan: That commencing in 2016, the Town adopt a conservation-oriented water rate structure that includes a two block rate structure where second block rate is set at a premium of 50% over the first block and where the second block is imposed on all residential consumption that exceeds 25m 3 per month; That projected revenue requirements (i.e. full costs projections), capital financing, rates and other financial information presented in this study form the basis for financing the water systems over the next 4 years ( ); That the rates and charges shown for be adopted for 2016 budgeting purposes; That third party funding particularly Federal and Provincial Government funding opportunities for capital projects and operational programs be pursued to supplement available reserve funds and enhance operations; That the capital financing projections presented in this study be updated if the Town decides in the future to consider debt financing; That for 2016 consideration be given to establishing an Asset Lifecycle Reserve Fund and a Rate Stabilization Reserve to fund asset replacement beyond 2031 and to provide a source of funding to offset any year-end operating deficits respectively; That that a $6.6 million interim borrowing be provided in 2016 to the Water Capital Reserve from the Wastewater Capital Reserve to ensure that the Water Capital Reserve maintain a positive balance over the 38 DFA Infrastructure International Inc.

101 Water Rate Study and O.Reg 453/07 Financial Plan No A April 15, 2015 forecast period, and that the interim borrowing shall be fully repaid by the earlier of 2031 or when sufficient funds in the Water Capital Reserve become available; That, as per the Innisfil/BWG Water Service Agreement (as amended), contributions towards the Water Treatment Plant Replacement Reserve be phased in over four (4) years commencing with a contribution of $211,482 in 2016, with further equal annual increases to 2019; That the Water Financial Plan No A including the Financial Statements presented herein be approved and submitted to the Ministry of Municipal Affairs and Housing (MMAH) before July 20, 2015 in accordance with the Drinking Water System Licence renewal requirements and O. Reg. 453/07; That a copy of the Water Financial Plan No A be posted on the Town s website; and The Town staff be directed to undertake a further Water Rate review in 2019 for Council approval prior to commencing the 2020 water rate setting exercise. 13 References American Water Works Association (AWWA) Manual: Principles of Water Rates, Fees and Charges Asset Management Plan Water Budget 5. Town of Innsifil Capital Budget Forecast and 2014 Water Consumption Records 7. Town of Innsifil 2013 Development Charge Background Study PSAB 3150 TCA 9. By-Law : 2014 Water Rates 10. Sustainable Water and Sewage Systems Act, Water Opportunities and Conservation Act, DFA Infrastructure International Inc.

102 APPENDICES

103 APPENDIX A By-law

104 THE CORPORATION OF THE TOWN OF INNISFIL BY-LAW NO A By-law of The Corporation of the to impose Water Rates and to prescribe the amount of such rates and to repeal By-law No WHEREAS the Municipal Act 2001, S.O. 2001, c. 25, Section 8 (1) provides that the powers of a municipality shall be interpreted broadly so as to confer broad authority on municipalities to enable municipalities to govern their affairs as they consider appropriate and to enhance their ability to respond to municipal issues; AND WHEREAS the Municipal Act 2001, S.O. 2001, c. 25, Section 9, provides that a municipality has the capacity, rights, powers and privileges of a natural person for the purpose of exercising its authority under the Act; AND WHEREAS the Municipal Act 2001, S.O. 2001, c. 25, Section 11, provides that a lower-tier municipality may pass by-laws respecting matters within the spheres of jurisdiction set out therein, inter alia: public utilities; AND WHEREAS subsection 326 (1) of the Municipal Act, 2001 as amended authorizes the council of a local municipality, in authorizing the installation of special services, to pass a by-law to: a) identify a prescribed special service; b) determine which of the costs, including capital costs, debenture charges, charges for depreciation or a reserve fund of the municipality are related to that special service; c) designate the area of the municipality in which the residents and property owners receive or will receive an additional benefit from the special service that is not received or will not be received on other areas of the municipality; d) determine the portion and set out the method of determining the portion of the costs determined which represent the additional costs to the municipality of providing the additional benefit in the area designated in clause (c); e) determine whether all or a specified portion of the additional costs determined in clause (d) shall be raised under subsection 326 (4) of the Act AND WHEREAS subsection 326 (4) of the Municipal Act, 2001 as amended authorizes the council of a local municipality, in authorizing the installation of special services, to levy a special local municipality levy under section 312 on the rateable property in the area designated in clause 1 (c) of Section 326 to raise the costs as determined in clause 1 (e) of Section 326 thereby imposing a water service rate upon owners or occupants of land who derive or will or may derive benefit there from sufficient to pay all or such portion of the capital costs of the works as the by-law may specify; AND WHEREAS the Council of the deems it expedient to pass a by-law imposing Water Rates and to prescribe the amount of such rates; AND WHEREAS it is now deemed necessary to repeal By-Law No and replace it with this by-law. /

105 Page 2 of 4 BY-LAW NO NOW THEREFORE the Council of The Corporation of the enacts the following: 1. THAT for the purpose of this by-law, the following definitions shall apply: 1.1 Town means The Corporation of the ; 1.2 Capital Cost means the cost of constructing wastewater works, inclusive of all items of cost usually and properly chargeable to capital account, and where applicable, the interest amounts payable on the debentures to be issued for the works and the imputed interest costs determined under subsection 326 (1) of the Municipal Act, 2001; 1.3 Water Rate means a charge for capital cost of water works and the operation, repair and maintenance of water works and includes a charge for depreciation, deferred maintenance or a reserve fund for any such purpose; 1.4 Water Works means any public works for the collection, production, treatment storage, supply or distribution of water, or any part of any works. 1.5 Billing Agent means Innpower Corporation and the contracted services rendered on behalf of the in regard to the billing and collection of water and wastewater services. 2. THAT every owner of land connected to the water works through which water is supplied by the Town shall pay a water rate to be calculated as determined in Schedule "A attached and forming part of this by-law and billed by the Billing Agent. 3. THAT the wastewater rate shall be included with the water rate billing and collected at the time and in the same manner as water rate charges, where applicable. 4. THAT annual base rates and variable consumption rate billing will commence on date of the meter installation. Base rates shall not apply to properties previously supplied with water that have been or are subject to demolition as confirmed by a Demolition Permit issued by the Town. 5. THAT if, for any cause, any meter shall be found to not be working properly, then the amount of water to be charged for shall be estimated on the average reading for the previous months, when the meter was working properly, or, if unavailable or proven inaccurate, the amount of water to be charged for shall be estimated on a daily average when the meter is working properly, and the charge for the water for the period during which the meter was not working properly shall be based thereon. 6. THAT variable rate charges for unbilled water due to a discrepancy will apply retroactively for the current year and the two years previous based on current year rates. If reasonable requests for access to repair metering equipment have been denied by the owner then retroactivity shall be to the date of the first request for access. 7. THAT where the water meter is equipped with a remote read-out unit of any type and a discrepancy occurs between the reading at the register of the water meter itself and the reading on the readout device the Town will deem the reading at the meter to be correct and will adjust and correct the customer's account accordingly. /

106 Page 3 of 4 BY-LAW NO THAT the meter must be installed prior to occupancy of the building. The meter shall remain the exclusive property of the Town and may be removed as and when the Town may see fit, upon the same being replaced by another meter, or for any reason which the Town may, in its discretion, deem necessary. 9. THAT the Town may shut off or restrict the supply of water to a property if the Town requires access to the property to install, replace, repair or inspect a water meter and the remote read out unit. Any person authorized by the Town for that purpose has free access, at all reasonable times, and upon notice given, to all parts of every building or other premises to which any water service is supplied for the purpose of inspecting or repairing, or of altering or disconnecting, within or without the building, or for placing meters upon any water service pipe or connection within or without the building as he/she considers expedient and for that purpose or for the purpose of protecting or regulating the use of the meter, may set it or alter the position of it. 10. THAT the owner shall be responsible for maintaining in good working order, the inlet valve to the water meter, and shall ensure that such meter and valve is accessible. 11. THAT the Treasurer or designate for the Town shall be responsible to carry out the financial provisions of this by-law and to administer this by-law. 12. THAT for the purpose of clarification, no exemptions from the water rate shall be permitted solely because of tax exempt status under the Assessment Act. 13. THAT all amounts billed by the Billing Agent are due and payable to the Billing Agent as per the due date established. 14. THAT if for any reason fees owing under this by-law remains unpaid after the due date, same shall bear interest at the rate of 1.25% per month until paid in full. 15. THAT all amounts pertaining to water or wastewater services invoiced and owing to the Billing Agent and remain unpaid are considered a debt owing to the Town and, together with all interest and penalties accumulated thereupon, may be collected through appropriate actions or added to the property tax account and collected in the same manner as permitted under section 398 (2) of the Municipal Act, THAT by-law is hereby repealed on March 1, 2015, when By-law comes into effect. 17. THAT this By-law shall take effect and come into force on March 1, PASSED THIS 18 th DAY OF FEBRUARY, Gord Wauchope, Mayor Karen Fraser, Acting Clerk /

107 Page 4 of 4 BY-LAW NO SCHEDULE A Water Rates Effective March 1, 2015 Annual Base Rates Residential Base $ Commercial Base $ Industrial Base $ Institutional Base $2, Variable Rate Per Cubic Meter $1.91 /

108 APPENDIX B Qualitative Analysis of Rate Structure Options

109 Appendix B Qualitative Analysis of Rate Structure Options Qualitative Analysis of Rate Structure Options Fixed fee A single flat fee applies to all customers Not beneficial in Innisfil where water meters are already in place and part of the normal operation. Major inequities exist because one flat fee applies regardless of water consumed or wastewater generated. Does not promote water conservation. This structure is not recommended for further consideration because it: - Is not fair and equitable as it does not consider water consumption or wastewater flows. - Does not utilize the Town current assets (water meters). - There is no economic incentive for customer to conserve. Uniform Rate This is a single unit price per cubic metre that applies to ALL customers regardless of customer type Widely accepted rate structure. Works well in situations where demand characteristics are similar across different customer types. Can be volatile as revenue is based entirely on consumption/flows. Simple to administer and understand compared to other structures. Promotes equity by having the same rate apply to all customers. User pay (customers pay for the amount of water consumed/ wastewater generated). Promotes conservation as customers pay more for higher consumption. Can have a fixed fee component (see next option). This structure is not recommended for further consideration because it: - Would result in significant cost increase to high volume users which is not consistent with the Industry Promotion principle. - Very volatile option that relies fully on consumption which could result in revenue shortfalls in wet years (decrease revenue stability).

110 Appendix B Qualitative Analysis of Rate Structure Options - Would require building a larger reserve to offset risk of revenue shortfall. Base Charge plus Uniform Rate The rate is comprised of a fixed portion regardless of consumption and a unit price portion based on consumption Provides stability in the revenue stream to the extent of the revenues generated from the base charge. This structure has all the benefits of a uniform rate including the promotion of conservation without the extreme revenue volatility. Structure currently employed by Innisfil. Declining Block Rate The unit price of water declines (in blocks) as consumption increases This structure is recommended for further consideration because it: - Would be used as a base against which other structures would be evaluated. - Would provide consistency from previous years. - Is understood by current users. - Promotes conservation while providing security of revenue Usually designed according to the demand patterns (and associated capacity needs) and cost of providing the service to each type of customer in order to maintain equity amongst customers. The number of size and number of blocks and the rate that applies to each block are normally designed according to the customer types and the differences between normal consumption and peak demand (i.e. the average to peak demand ratio needs to be determined for each customer type). Key assumption is that larger customers have more uniform consumption patterns than smaller (residential customers). Usually the first block is designed for residential and small commercial users. Additional blocks are geared to high consumption users such as industry and agriculture. Can be used as an economic incentive for higher consumption customers. Can have a minimum fixed fee component below a specified consumption volume. Applies in areas where the cost of managing the system declines with volume delivered to and used by customers. Viewed as a disincentive for conservation. General perception that declining rates tend to be a discount for higher volume water users and promotes wasteful uses.

111 Appendix B Qualitative Analysis of Rate Structure Options Generally not used where water supplies are limited or where promotion of conservation is desired. Frequently used (and works best) in cases where there is a good water supply and same rates apply to ALL customer types. Data on consumption patterns (normal and peak capacity needs) and costs specific to each type of customer needs to be acquired and maintained on a consistent basis for rate and block design and fairness. This aspect can be costly and complex. Generally provides a stable revenue stream if a base charge component is included. This structure is not recommended for further consideration because it: - Diminishes the existing economic incentive for conservation. Increasing Block Rate The Unit Price of Water increases (in blocks) as consumption increases Requires details on consumption by block and customer. Used in situations where avoidance of capacity expansions is necessary. More difficult to explain and communicate to users. Requires clear understanding of how customers might respond to different rates. Requires that the different types of customers can be easily differentiated. If applied equally to all customers, then it could result in inequities (especially to high volume users with uniform demand). Inequities can easily result if the time, effort and resources are not invested in acquiring all the necessary information. Perceived as promoting conservation particularly in areas of scarce water supplies. Revenues not as stable due to the fact that a greater proportion of revenues are dependent on higher volume water users that have the tendency to reduce consumption whenever possible. This structure is recommended for further consideration because it:

112 Appendix B Qualitative Analysis of Rate Structure Options - Increases the existing economic incentive for conservation. Seasonal Charge These are rates that are time based. Volumetric charge that is higher only for water used during the peak water demand season Rates tend to closely follow consumption patterns. Lower rates during lower consumption periods and higher rates apply to higher consumption periods. Seasonal consumption by customer type is required. Generally used to promote reduction of peak consumption. Customers may tend to shift consumption to off peak times if or when possible. Can be used as an incentive to conserve and is accepted in areas with short water supplies. However, other measures such as routine water restrictions during peak demand can achieve conservation without the complicating the water rate. More difficult to administer as the precise start and end point of each period may have to be clearly identified. Seasonal rates could be combined with other structures but increases complexity and ease of administration. Can be very volatile in terms of revenue stability depending on differences between season rates and customer response to higher rates. This rate structure was not considered further because it: Excessive Use Charge Volumetric charge that is higher for all demand during the peak water demand season in excess of a threshold - Requires detailed study of seasonal consumption patterns by customer type to achieve fairness and equity. - Can be very volatile ( i.e. not stable) due to seasonal consumption patterns - Is not equitable as it would increase the cost during the peak season to low volume water users where consumption is for essential needs and can t be adjusted. - Rates tend to closely follow consumption patterns. - Lower rates during lower consumption periods and higher rates apply to higher consumption periods. - Seasonal consumption by customer type is required. - Generally used to promote reduction of peak consumption. Customers may tend to shift consumption to off peak times if or when possible. - Used as an incentive to conserve and is accepted in areas with short water supplies. However, other measures such as routine water restrictions during peak demand can

113 Appendix B Qualitative Analysis of Rate Structure Options achieve conservation without the complicating the water rate. - Tends to be equitable from a demand perspective as those customers with higher peak demand are charged according to the costs of such demands. - More difficult to administer as the precise start and end point of each period may have to be clearly identified. - Can be very volatile in terms of revenue stability depending on differences between season rates and customer response to higher rates. This structure is recommended for further consideration because it: - Increases the existing economic incentive for conservation - It would not increase the cost during the peak season to low volume water users where consumption is uniform. - Would target the recovery of peak-demand-related costs from users that create the peak demand.

114 APPENDIX C Customer Growth Projections

115 Appendix C: Customer Growth Projections ( ) Water Customer Growth Projections Customers Residential 8,163 8,397 8,708 9,082 9,484 9,915 10,374 10,833 11,569 12,582 13,595 14,609 15,531 16,360 17,189 18,019 18,849 Non-Residential Total Number of Customers 8,380 8,616 8,929 9,305 9,709 10,143 10,604 11,065 11,804 12,821 13,837 14,856 15,781 16,614 17,446 18,280 19,114

116 APPENDIX D Customer Consumption Projections

117 Appendix D: Water Consumption Projections ( ) Water Consumption Projection Customer Class Residential 1,385,412 1,396,156 1,417,847 1,447,444 1,478,820 1,546,195 1,617,948 1,689,700 1,804,754 1,963,110 2,121,466 2,279,978 2,424,108 2,553,700 2,683,292 2,813,041 2,942,789 Commercial 144, , , , , , , , , , , , , , , , ,194 Industrial 14,588 14,291 13,993 13,695 13,397 14,142 14,142 14,142 14,142 14,142 14,142 14,886 14,886 14,886 14,886 14,886 15,630 Industitutional 37,481 36,716 35,951 35,186 34,421 34,421 34,421 34,421 34,421 34,421 34,421 34,421 34,421 34,421 34,421 34,421 34,421 Total Project Consumption 1,582,033 1,590,256 1,609,362 1,636,313 1,664,981 1,734,498 1,807,648 1,880,797 1,997,948 2,159,098 2,319,550 2,481,601 2,627,827 2,760,214 2,891,902 3,024,446 3,157,035

118 APPENDIX E Capital Forecast

119 Appendix E: Capital Forecast ( ) Capital Expenditures Description 2015 Budget Budget Forecast Innisfil Heights Watermain Replacement 7,994, T-Connections on the watermain on 25th Sideroad 150, Servicing Route to Friday Harbour Resort Sanitary Lateral and Water Services Smart Metering Program - 510, , , , Budget Forecast (Growth) Lefroy Lakeshore Watermain Extension 1,489, Innisfil Heights Transmission Watermain along IBR 50, th Line Watermain (St. John's Road to Zone 1 Boundary) 769, Innisfil Heights Transmission Watermain along IBR - 51, Innisfil Heights Transmission Watermain along IBR ,886, Churchill Reservoir and Booster Station ,939, Innisfil Heights Reservoir Supply - Phase ,029, IH Zone 3 Pump Station Extra Pump Installation - Phase , Alcona Reservoir Expansion ,630, Water Treatment Plant - Phase 3 Expansion ,444, Zone 2 Security Supply Watermain (On 20th from IBR to 6th line) ,569, New Zone 2 Water Pumping Station- Phase ,737, Innisfil Heights Reservoir - Phase ,413, Trunk Watermain - Ewart St and Killarney Beach Rd ,286, Non-TCA Water Sytem Financial Plan & Rate Study Municipal Water Use Efficiency Program - 10,200 10, Water Conservation and Efficiency Strategy Updates , , WCES Education and Strategy ,937 21,397 18,953 22,262 17,926 42, Total Capital Expenditures - Capital Program 10,452, ,200 12,417, ,604 5,502,003 5,591,242 30,666,346 6,756,339 5,436,198 3,328,333 42, Forecast Inventory Replacement from Inventory Sheets Lifecycle Needs Watermains , Hydrants - 804, , ,483 21, ,000-1,421,374-14,937 40, , ,355 75,454 Valves , Wells - 942, , , , , ,896 - Pumping Stations Reservoirs Treatment Plant Total Capital Expenditures 10,452,425 2,318,270 12,585, ,593 5,697,486 5,612,915 30,666,346 6,756,339 5,459,198 3,328,333 1,464, ,560 14, , , ,251 75,454 Capital Financing Provincial/Federal Grants /ARS 10,135 21,825 18,953 22,707 1,265,065 43, Gas Tax Funding Other - 484,500 External Contributions - 6,553,838 Development Charges 2,258,000 51,000 5,943, ,045 5,581,305 24,090,684 6,737,386 5,413,937 2,063, Development Charges (Innisfil Heights) - Non-Growth Related Debenture Requirements (0) Growth Related Debenture Requirements Operating Contributions (Capital From Current) Water Treatment Plan Reserve Fund Table F1-Water Capital Reserve Fund 8,194,425 1,782,770 6,642, ,593 4,808,441 21, ,554-1,420, ,560 14, , , ,251 75,454 Total Capital Financing 10,452,425 2,318,270 12,585, ,593 5,697,486 5,612,915 30,666,346 6,756,339 5,459,198 3,328,333 1,464, ,560 14, , , ,251 75,454

120 APPENDIX F Reserve Projections

121 Appendix F: Reserve Projections Table F1-Water Capital Reserve Fund Description Opening Balance 2,116,698 (3,475,544) 3,942,330 42,971 2,138,614 41, , ,963 1,135,606 1,445,862 1,819, , ,210 2,207,064 3,669,834 5,736,714 9,171,643 Transfer from Operating 2,646,786 2,687,451 2,742,411 2,723,791 2,710, , , , , , , ,984 1,218,467 1,560,200 2,710,998 3,769,479 4,025,747 Transfer to Stabilization Reserve - Transfer from Wastewater (loan) 6,600,000 Transfer to Wastewater (loan) , , ,806 1,221,175 1,183,213 1,170,079 1,293, , Transfer from operating to fund Wastewater Loan Repayment , , ,806 1,221,175 1,183,213 1,170,079 1,293, , Transfer to Capital 8,194,425 1,782,770 6,642, ,593 4,808,441 21,475 22,554 1,420, ,560 14, , , ,251 75,454 Transfer to Operating 137,400 Closing Balance (3,430,941) 3,891,737 42,420 2,111,169 40, , ,980 1,121,033 1,427,307 1,796, , ,695 2,178,740 3,622,738 5,663,093 9,053,942 13,121,936 Interest (44,602) 50, , ,088 9,984 14,573 18,555 23,356 10,360 12,515 28,324 47,096 73, , ,585 Table F2-Water Treatment Plant Replacement Reserve Fund Description Opening Balance , ,478 1,922,247 2,804,159 3,697,537 4,688,393 5,692,130 6,708,916 7,738,920 8,782,314 9,839,272 10,909,970 11,994,589 13,093,307 14,206,308 Transfer from Operating - 211, ,963 1,252, , , , , , , , , , , , , ,689 Transfer to Capital Transfer to Operating Closing Balance - 211, ,194 1,897,578 2,768,173 3,650,086 4,628,226 5,619,082 6,622,819 7,639,605 8,669,609 9,713,003 10,769,961 11,840,660 12,925,278 14,023,996 15,136,997 Interest - 2,749 8,284 24,669 35,986 47,451 60,167 73,048 86,097 99, , , , , , , ,781 Table F3-Water Development Charges Reserve Fund Description Opening Balance (2,196,328) (326,306) 3,580,048 1,780,254 6,041,101 8,389,603 6,289,596 (1,263,627) (1,280,054) (1,296,695) 152,740 3,851,217 7,699,072 11,698,252 15,850,720 20,158,469 24,623,520 Development Charge Proceeds 3,961,440 4,093,530 4,178,160 4,231,630 4,080,830 4,351,530 4,433,970 3,428,740 4,371,090 4,461,690 4,600,000 4,700,000 4,800,000 4,900,000 5,000,000 5,100,000 5,200,000 Debenture Proceeds Transfer to Capital 2,258,000 51,000 5,943, ,045 5,581,305 24,090,684 6,737,386 5,413,937 2,063, Front-End Financing 13,070,654 4,259,594 1,993,795 Transfer from Operating 287, , , , , , , , , , , , , , , , ,453 Transfer to Operating 116, , , ,763 1,169,401 1,169,400 1,169,400 1,169,401 1,169,401 1,169,401 1,169,399 1,169,401 1,169,399 1,169,400 1,169,401 1,169,400 1,169,401 Closing Balance (322,118) 3,534,104 1,757,408 5,963,574 8,281,938 6,208,881 (1,247,411) (1,263,627) (1,280,054) 150,779 3,801,794 7,600,269 11,548,126 15,647,305 19,899,772 24,307,522 28,872,572 Interest (4,188) 45,943 22,846 77, ,665 80,715 (16,216) (16,427) (16,641) 1,960 49,423 98, , , , , ,343 Table F4-Water Innisfil Heights Reserve Fund Description Opening Balance (2,585,165) (2,618,772) (2,652,816) (2,687,303) (2,722,238) (2,757,627) (2,793,476) (2,829,791) (2,866,579) (2,903,844) (2,941,594) (2,979,835) (3,018,573) (3,057,814) (3,097,566) (3,137,834) (3,178,626) External Contributions Transfer to Capital Transfer to Operating Closing Balance (2,585,165) (2,618,772) (2,652,816) (2,687,303) (2,722,238) (2,757,627) (2,793,476) (2,829,791) (2,866,579) (2,903,844) (2,941,594) (2,979,835) (3,018,573) (3,057,814) (3,097,566) (3,137,834) (3,178,626) Interest (33,607) (34,044) (34,487) (34,935) (35,389) (35,849) (36,315) (36,787) (37,266) (37,750) (38,241) (38,738) (39,241) (39,752) (40,268) (40,792) (41,322) - Table F5-Water Lifecycle Reserve Fund Description Opening Balance ,632,219 5,312,561 8,426,593 11,716,571 15,124,004 18,660,548 22,579,960 26,550,325 30,572,305 34,646,570 38,773,801 Transfer from Operating ,598,439 2,612,165 3,005,892 3,139,618 3,213,344 3,297,070 3,629,640 3,629,640 3,629,640 3,629,640 3,629,640 3,629,640 Transfer to Capital Transfer to Operating Closing Balance ,598,439 5,244,384 8,318,453 11,566,211 14,929,915 18,421,074 22,290,188 26,209,600 30,179,965 34,201,945 38,276,210 42,403,441 Interest ,780 68, , , , , , , , , , ,245 Table F6-Projected Operating Reserve Balance Description Stabilization Reserve Opening Balance 0 (31,528) (0) 15,000 30,000 45,000 60,001 75,000 90, , , , , , , , ,001 Transfer From Capital Reserve (Contributions from) Operating Budget to Offset Surplus - (Cash Inflow) - 31,528 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 Contributions from Operating Budget - (Cash Inflow) Contributions to Operating Budget - (Cash Outflow) (Contributions to) Operating Budget to Offset Deficit- (Cash Outflow) 31, Rate Stabilization Reserve Closing Balance (31,528) (0) 15,000 30,000 45,000 60,001 75,000 90, , , , , , , , , ,001 Rate Stabilization Reserve Closing Balance as a % of Gross Annual Cost (target =1.5% to 2%) -0.49% 0.00% 0.21% 0.37% 0.52% 0.66% 0.78% 0.93% 1.03% 1.11% 1.17% 1.21% 1.29% 1.35% 1.41% 1.46% 1.48%

122 APPENDIX G Operations & Maintenance Projections

123 Appendix G: Operations & Maintenance Projections ( ) Description 2015 Budget Operating Expenditures Total Water Administration 1,971,759 2,038,479 2,093,716 2,135,590 2,178,302 2,221,868 2,266,306 2,311,632 2,357,864 2,405,022 2,453,122 2,502,184 2,552,228 2,603,273 2,655,338 2,708,445 2,762,614 Total Well Systems Supply 253, , , , , , , , , , , , , , , , ,195 Total Well Systems Distribution 36,188 37,997 39,897 40,695 41,509 42,339 43,186 44,050 44,931 45,829 46,746 47,681 48,634 49,607 50,599 51,611 52,643 Total Lakeshore Supply 786, , , , , , , ,629 1,007,382 1,027,529 1,048,080 1,069,041 1,090,422 1,112,231 1,134,475 1,157,165 1,180,308 Carbon Regeneration (every 5 years) 300, , , ,761 Total Lakeshore Distribution 48,301 50,716 53,251 54,316 55,402 56,510 57,641 58,793 59,969 61,169 62,392 63,640 64,913 66,211 67,535 68,886 70,264 Total BWG Watermain & Booster Stn 104, , , , , , , , , , , , , , , , ,131 Total Water Fleet 51,421 54,332 56,340 57,467 58,616 59,788 60,984 62,204 63,448 64,717 66,011 67,332 68,678 70,052 71,453 72,882 74, Water Conservation and Efficiency Staff 31,530 40,331 41,137 41,960 42,799 43,655 44,528 45,419 46,327 47,254 48,199 49,163 50,146 51,149 52,172 53,216 54, Incremental Hydro/Chemicals (to be added in the Model) ,094 10,771 26,184 26,977 26,403 41,453 54,752 51,455 49,340 42,447 37,017 35,757 35,037 34, DC Reserve Contribution Transfer to DC Reserve 287, , , , , , , , , , , , , , , , ,453 Forecast Rate Stabilization Contributions Transfer to Operating Reserve Sub Total Operating Expenditures 3,571,790 3,954,523 3,792,420 3,873,994 3,947,580 4,037,360 4,445,231 4,190,805 4,284,774 4,378,570 4,457,380 4,904,714 4,617,546 4,699,249 4,786,865 4,876,798 5,372,171 Capital-Related Existing Debt (Principal) - Non-Growth Related Existing Debt (Interest) - Non-Growth Related 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 40,000 Existing Debt (Principal) - Growth Related 52, , , , , , , , , , , , , , , , ,608 Existing Debt (Interest) - Growth Related 64, , , , , , , , , , , , , , , , ,793 New Non-Growth Related Debt (Principal) (0) New Non-Growth Related Debt (Interest) (0) New Growth Related Debt (Principal) New Growth Related Debt (Interest) Transfer to Capital Budget Transfer to Capital Reserves and Reserve Funds 2,646,786 2,687, ,742, ,723,791 2,710, , , , , , , ,984 1,218,467 1,560,200 2,710,998 3,769,479 4,025,747 Transfer to Capital Reserves and Reserve Funds - WTP Replacement 211, ,963 5,743, , , , , , , , , , , , , ,689 Transfer to Reserve for Repayment of Wastewater Loan 35, , ,806 1,221,175 1,183,213 1,170,079 1,293, ,000 Transfer to Lifecycle Reserve 2,598,439 2,612,165 3,005,892 3,139,618 3,213,344 3,297,070 3,629,640 3,629,640 3,629,640 3,629,640 3,629,640 3,629,640 Sub Total Capital Related Expenditures 2,803,764 3,339,506 3,481,147 8,773,630 4,765,712 5,025,521 5,123,780 5,524,891 5,915,628 6,478,956 7,055,832 7,452,928 8,158,274 8,623,152 9,080,728 9,539,208 9,795,477 Total Expenditures 6,375,554 7,294,029 7,273,567 12,647,624 8,713,293 9,062,881 9,569,012 9,715,696 10,200,401 10,857,526 11,513,212 12,357,641 12,775,821 13,322,402 13,867,593 14,416,007 15,167,649 Non-Rate Revenues 4306 Recovery from BWG 895, ,152 1,012,949 1,033,208 1,053,872 1,074,950 1,096,449 1,118,378 1,140,745 1,163,560 1,186,831 1,210,568 1,234,779 1,259,475 1,284,664 1,310,358 1,336,565 50% Recovery from BWG of Costs Carbon Regeneration (every 5 years) 150, , , , Recovery from BWG Lump Sum Payment for Phase 1 WTP Assets 5,108, Administration Fees 9,000 9,000 9,000 9,180 9,364 9,551 9,742 9,937 10,135 10,338 10,545 10,756 10,971 11,190 11,414 11,642 11, Billing Revenue - Bulk Water 20,000 20,000 20,000 20,400 20,808 21,224 21,649 22,082 22,523 22,974 23,433 23,902 24,380 24,867 25,365 25,872 26, Misc. Revenue Penalties & Interest (Non-Tax) 18,000 18,000 18,000 18,360 18,727 19,102 19,484 19,873 20,271 20,676 21,090 21,512 21,942 22,381 22,828 23,285 23, Sprinkler Fees ,004 1,024 1,044 1,065 1,087 1, Water Meter Fees 90,000 90,000 90,000 91,800 93,636 95,509 97,419 99, , , , , , , , , , Investment Income 71,000 71,000 71,000 72,420 73,868 75,346 76,853 78,390 79,958 81,557 83,188 84,852 86,549 88,280 90,045 91,846 93, Rental Income (Cookstown) 16,700 16,700 16,700 17,034 17,375 17,722 18,077 18,438 18,807 19,183 19,567 19,958 20,357 20,764 21,180 21,603 22,035 Total-Non Rate Revenues 1,121,400 1,339,692 1,238,489 6,371,890 1,288,524 1,314,294 1,506,192 1,367,392 1,394,740 1,422,635 1,451,087 1,662,958 1,509,711 1,539,905 1,570,704 1,602,118 1,836,040 Operating Subsidies Contributions from Development Charges Reserve Fund 116, , , ,763 1,169,401 1,169,400 1,169,400 1,169,401 1,169,401 1,169,401 1,169,399 1,169,401 1,169,399 1,169,400 1,169,401 1,169,400 1,169,401 Contributions from Innisfil Heights Reserve Fund Contributions from Capital Reserves / Reserve Funds - #1-137, Contributions from Capital Reserves / Reserve Funds - # Contributions from Operating Reserve Total Operating Revenue 1,238,378 1,877,665 1,514,262 6,638,653 2,457,925 2,483,694 2,675,592 2,536,793 2,564,141 2,592,036 2,620,486 2,832,359 2,679,110 2,709,305 2,740,105 2,771,518 3,005,441 Net Water Costs To Be Recovered From Users 5,137,176 5,416,364 5,759,305 6,008,971 6,255,368 6,579,187 6,893,419 7,178,903 7,636,261 8,265,491 8,892,726 9,525,282 10,096,710 10,613,096 11,127,489 11,644,489 12,162,207

124 APPENDIX H Base Charge Projections

125 Appendix H: Base Charge Projections ( ) Proposed Base Charges by Class for the Years Customer Class Annual % Increase 8.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Residential $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Commercial $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Industrial $ $ $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, Institutional $2, $2, $2, $2, $2, $2, $2, $2, $2, $2, $2, $2, $2, $2, $2, $2, $2,893.76

126 APPENDIX I Consumption Water Rate Projections

127 Appendix I: Consumption Water Rate Comparison Option Description Annual % Increase 9.0% 3.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Option 1 UNIFORM RATE $1.91 $2.08 $2.14 $2.14 $2.14 $2.14 $2.14 $2.14 $2.14 $2.14 $2.14 $2.14 $2.14 $2.14 $2.14 $2.14 $2.14 INCREASING BLOCK RATE (All Users Year Round) Projected Consumption Water Rates for the Years Option 2 Annual % Increase 1.0% 4.0% 1.0% 1.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Block 1 (80% of consumption) $1.91 $1.93 $2.00 $2.02 $2.05 $2.05 $2.05 $2.05 $2.06 $2.06 $2.07 $2.07 $2.07 $2.07 $2.08 $2.08 $2.08 Block 2 (20% of consumption) $2.89 $3.01 $3.04 $3.07 $3.07 $3.08 $3.08 $3.09 $3.09 $3.10 $3.10 $3.11 $3.11 $3.12 $3.12 $3.12 Option 3 Option 4 INCREASING BLOCK RATE (Residential Users Only Year Round) Annual % Increase 6.0% 4.0% 1.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Block 1 (91% of consumption) $1.91 $2.02 $2.10 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 Block 2 (9% of consumption) $3.03 $3.15 $3.17 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 EXCESSIVE USE CHARGE (Residential Users Only During Peak Demand-June to September) Annual % Increase 7.0% 3.0% 1.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Block 1 (95% of consumption) $1.91 $2.04 $2.11 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 Block 2 (5% of consumption) $3.06 $3.16 $3.17 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18

128 APPENDIX J Residential Customer Impacts

129 Appendix J: Residential Customer Impacts Annual Base Charge Option 1 (Constant Rate) Residential Customer Impacts for the Years $222 $240 $252 $262 $270 $275 $278 $278 $278 $278 $278 $278 $278 $278 $278 $278 $278 Annual Consumptive Charge $332 $362 $373 $373 $373 $373 $373 $373 $373 $373 $373 $373 $373 $373 $373 $373 $373 Total Annual Residential Bill (Option 1) $555 $602 $625 $635 $643 $648 $651 $651 $651 $651 $651 $651 $651 $651 $651 $651 $651 Annual Bill Increase ($) $16 $48 $23 $10 $8 $5 $3 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 3.1% 8.6% 3.8% 1.6% 1.2% 0.8% 0.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Option 2 (Increasing Block) Annual Base Charge $222 $240 $252 $262 $270 $275 $278 $278 $278 $278 $278 $278 $278 $278 $278 $278 $278 Annual Consumptive Charge $332 $335 $349 $352 $356 $356 $357 $357 $358 $359 $360 $360 $361 $361 $361 $362 $362 Total Annual Residential Bill (Option 2) $555 $575 $601 $614 $626 $632 $635 $635 $636 $637 $638 $638 $639 $639 $639 $640 $640 Annual Bill Increase ($) $16 $21 $25 $14 $12 $6 $3 $0 $1 $1 $1 $1 $1 $0 $0 $0 $0 Annual Bill Increase (%) 3.1% 3.8% 4.4% 2.3% 1.9% 0.9% 0.5% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.0% 0.0% Option 3 (Increasing Block -Residential Only) Annual Base Charge $222 $240 $252 $262 $270 $275 $278 $278 $278 $278 $278 $278 $278 $278 $278 $278 $278 Annual Consumptive Charge $332 $351 $365 $368 $369 $369 $369 $369 $369 $369 $369 $369 $369 $369 $369 $369 $369 Total Annual Residential Bill (Option 3) $555 $591 $617 $630 $639 $645 $647 $647 $647 $647 $647 $647 $647 $647 $647 $647 $647 Annual Bill Increase ($) $16 $37 $26 $13 $9 $5 $3 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 3.1% 6.6% 4.3% 2.1% 1.4% 0.8% 0.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Option 4 (Excessive Use Charge) Annual Base Charge $222 $240 $252 $262 $270 $275 $278 $278 $278 $278 $278 $278 $278 $278 $278 $278 $278 Annual Consumptive Charge $332 $355 $367 $368 $369 $369 $369 $369 $369 $369 $369 $369 $369 $369 $369 $369 $369 Total Annual Residential Bill (Option 4) $555 $595 $619 $630 $639 $645 $647 $647 $647 $647 $647 $647 $647 $647 $647 $647 $647 Annual Bill Increase ($) $16 $41 $24 $11 $9 $5 $3 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 3.1% 7.3% 4.0% 1.8% 1.4% 0.8% 0.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Summary of Residential Customer Annual Wate Option 1 (Constant Rate) $555 $602 $625 $635 $643 $648 $651 $651 $651 $651 $651 $651 $651 $651 $651 $651 $651 Option 2 (Increasing Block) $555 $575 $601 $614 $626 $632 $635 $635 $636 $637 $638 $638 $639 $639 $639 $640 $640 Option 3 (Increasing Block -Residential Only) $555 $591 $617 $630 $639 $645 $647 $647 $647 $647 $647 $647 $647 $647 $647 $647 $647 Option 4 (Excessive Use Charge) $555 $595 $619 $630 $639 $645 $647 $647 $647 $647 $647 $647 $647 $647 $647 $647 $647

130 APPENDIX K Commercial Customer Impacts

131 Appendix K: Commercial Customer Impacts Annual Base Charge Option 1 (Constant Rate) Commercial Customer Impacts for the Years $397 $428 $450 $468 $482 $491 $496 $496 $496 $496 $496 $496 $496 $496 $496 $496 $496 Annual Consumptive Charge $1,528 $1,666 $1,715 $1,715 $1,715 $1,715 $1,715 $1,715 $1,715 $1,715 $1,715 $1,715 $1,715 $1,715 $1,715 $1,715 $1,715 Total Annual Commercial/Industrial Bill (Option 1) $1,925 $2,094 $2,165 $2,183 $2,197 $2,207 $2,212 $2,212 $2,212 $2,212 $2,212 $2,212 $2,212 $2,212 $2,212 $2,212 $2,212 Annual Bill Increase ($) $29 $169 $71 $18 $14 $10 $5 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 1.6% 8.8% 3.4% 0.8% 0.6% 0.4% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Option 2 (Increasing Block) Annual Base Charge $397 $428 $450 $468 $482 $491 $496 $496 $496 $496 $496 $496 $496 $496 $496 $496 $496 Annual Consumptive Charge $1,528 $2,024 $2,105 $2,126 $2,149 $2,151 $2,154 $2,157 $2,161 $2,165 $2,170 $2,173 $2,176 $2,178 $2,181 $2,182 $2,184 Total Annual Commercial/Industrial Bill (Option 2) $1,925 $2,452 $2,554 $2,594 $2,630 $2,643 $2,650 $2,653 $2,657 $2,662 $2,666 $2,670 $2,673 $2,675 $2,677 $2,679 $2,680 Annual Bill Increase ($) $29 $528 $102 $39 $37 $12 $8 $3 $4 $5 $4 $3 $3 $2 $2 $2 $2 Annual Bill Increase (%) 1.6% 27.4% 4.1% 1.5% 1.4% 0.5% 0.3% 0.1% 0.1% 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Option 3 (Increasing Block -Residential Only) Annual Base Charge $397 $428 $450 $468 $482 $491 $496 $496 $496 $496 $496 $496 $496 $496 $496 $496 $496 Annual Consumptive Charge $1,528 $1,615 $1,678 $1,692 $1,698 $1,698 $1,698 $1,698 $1,698 $1,698 $1,698 $1,697 $1,697 $1,697 $1,697 $1,697 $1,697 Total Annual Commercial/Industrial Bill (Option 3) $1,925 $2,044 $2,127 $2,160 $2,180 $2,189 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 Annual Bill Increase ($) $29 $119 $84 $33 $20 $10 $5 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 1.6% 6.2% 4.1% 1.5% 0.9% 0.4% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Option 4 (Excessive Use Charge) Annual Base Charge $397 $428 $450 $468 $482 $491 $496 $496 $496 $496 $496 $496 $496 $496 $496 $496 $496 Annual Consumptive Charge $1,528 $1,633 $1,687 $1,692 $1,698 $1,698 $1,698 $1,698 $1,698 $1,698 $1,698 $1,697 $1,697 $1,697 $1,697 $1,697 $1,697 Total Annual Commercial/Industrial Bill (Option 4) $1,925 $2,061 $2,137 $2,160 $2,180 $2,189 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 Annual Bill Increase ($) $29 $136 $76 $23 $20 $10 $5 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 1.6% 7.1% 3.7% 1.1% 0.9% 0.5% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Summary of Commercial/Industrial Customer Annual Water Charge Option 1 (Constant Rate) $1,925 $2,094 $2,165 $2,183 $2,197 $2,207 $2,212 $2,212 $2,212 $2,212 $2,212 $2,212 $2,212 $2,212 $2,212 $2,212 $2,212 Option 2 (Increasing Block) $1,925 $2,452 $2,554 $2,594 $2,630 $2,643 $2,650 $2,653 $2,657 $2,662 $2,666 $2,670 $2,673 $2,675 $2,677 $2,679 $2,680 Option 3 (Increasing Block -Residential Only) $1,925 $2,044 $2,127 $2,160 $2,180 $2,189 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 Option 4 (Excessive Use Charge) $1,925 $2,061 $2,137 $2,160 $2,180 $2,189 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194 $2,194

132 APPENDIX L Institutional Customer Impacts

133 Appendix L: Institutional Customer Impacts Annual Base Charge Option 1 (Constant Rate) $2,312 $2,497 $2,622 $2,727 $2,809 $2,865 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 Annual Consumptive Charge $8,118 $8,848 $9,114 $9,114 $9,114 $9,114 $9,114 $9,114 $9,114 $9,114 $9,114 $9,114 $9,114 $9,114 $9,114 $9,114 $9,114 Total Annual Institutional Bill (Option 1) $10,430 $11,345 $11,736 $11,841 $11,922 $11,979 $12,007 $12,007 $12,007 $12,007 $12,007 $12,007 $12,007 $12,007 $12,007 $12,007 $12,007 Annual Bill Increase ($) $171 $916 $390 $105 $82 $56 $29 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 1.7% 8.8% 3.4% 0.9% 0.7% 0.5% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Option 2 (Increasing Block) Institutional Customer Impacts for the Years Annual Base Charge $2,312 $2,497 $2,622 $2,727 $2,809 $2,865 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 Annual Consumptive Charge $8,118 $12,000 $12,477 $12,603 $12,738 $12,753 $12,770 $12,786 $12,809 $12,838 $12,864 $12,884 $12,902 $12,915 $12,928 $12,939 $12,949 Total Annual Institutional Bill (Option 2) $10,430 $14,498 $15,099 $15,330 $15,547 $15,618 $15,664 $15,680 $15,703 $15,732 $15,758 $15,778 $15,796 $15,809 $15,822 $15,833 $15,843 Annual Bill Increase ($) $171 $4,068 $601 $231 $217 $72 $46 $16 $23 $28 $26 $20 $18 $13 $13 $11 $10 Annual Bill Increase (%) 1.7% 39.0% 4.1% 1.5% 1.4% 0.5% 0.3% 0.1% 0.1% 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Option 3 (Increasing Block -Residential Only) Annual Base Charge $2,312 $2,497 $2,622 $2,727 $2,809 $2,865 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 $2,894 Annual Consumptive Charge $8,118 $8,581 $8,913 $8,990 $9,021 $9,020 $9,020 $9,020 $9,019 $9,019 $9,018 $9,018 $9,017 $9,017 $9,017 $9,016 $9,016 Total Annual Institutional Bill (Option 3) 10,430 11,078 11,535 11,717 11,830 11,886 11,914 11,913 11,913 11,912 11,912 11,911 11,911 11,911 11,910 11,910 11,910 Annual Bill Increase ($) Annual Bill Increase (%) 1.7% 6.2% 4.1% 1.6% 1.0% 0.5% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Option 4 (Excessive Use Charge) Annual Base Charge 2,312 2,497 2,622 2,727 2,809 2,865 2,894 2,894 2,894 2,894 2,894 2,894 2,894 2,894 2,894 2,894 2,894 Annual Consumptive Charge 8,118 8,673 8,961 8,990 9,021 9,020 9,020 9,020 9,019 9,019 9,018 9,018 9,017 9,017 9,017 9,016 9,016 Total Annual Institutional Bill (Option 4) 10,430 11,171 11,583 11,717 11,830 11,886 11,914 11,913 11,913 11,912 11,912 11,911 11,911 11,911 11,910 11,910 11,910 Annual Bill Increase ($) Annual Bill Increase (%) 1.7% 7.1% 3.7% 1.2% 1.0% 0.5% 0.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Summary of Institutional Customer Annual Water Charge Option 1 (Constant Rate) $10,430 $11,345 $11,736 $11,841 $11,922 $11,979 $12,007 $12,007 $12,007 $12,007 $12,007 $12,007 $12,007 $12,007 $12,007 $12,007 $12,007 Option 2 (Increasing Block) $10,430 $14,498 $15,099 $15,330 $15,547 $15,618 $15,664 $15,680 $15,703 $15,732 $15,758 $15,778 $15,796 $15,809 $15,822 $15,833 $15,843 Option 3 (Increasing Block -Residential Only) $10,430 $11,078 $11,535 $11,717 $11,830 $11,886 $11,914 $11,913 $11,913 $11,912 $11,912 $11,911 $11,911 $11,911 $11,910 $11,910 $11,910 Option 4 (Excessive Use Charge) $10,430 $11,171 $11,583 $11,717 $11,830 $11,886 $11,914 $11,913 $11,913 $11,912 $11,912 $11,911 $11,911 $11,911 $11,910 $11,910 $11,910

134 APPENDIX M Customer Impacts over Base Option

135 Appendix M: Customer Impact over Base Option for the Years Customer Impact over Base Option - Option 2 (Increasing Block) Customer Class Residential $0 ($27) ($24) ($21) ($17) ($17) ($16) ($16) ($15) ($14) ($14) ($13) ($12) ($12) ($12) ($11) ($11) Commercial/Industrial $0 $359 $389 $410 $433 $436 $439 $441 $445 $450 $454 $458 $461 $463 $465 $467 $469 Institutional $0 $3,152 $3,363 $3,489 $3,624 $3,639 $3,657 $3,673 $3,696 $3,724 $3,750 $3,770 $3,788 $3,801 $3,815 $3,825 $3,835 Customer Impact over Base Option - Option 3 (Increasing Block -Residential Only) Customer Class Residential $0 ($7) ($6) ($5) ($4) ($4) ($4) ($4) ($4) ($4) ($4) ($4) ($4) ($4) ($4) ($4) ($4) Commercial/Industrial $0 ($50) ($38) ($23) ($17) ($18) ($18) ($18) ($18) ($18) ($18) ($18) ($18) ($18) ($18) ($18) ($18) Institutional $0 ($267) ($201) ($124) ($93) ($93) ($93) ($94) ($94) ($95) ($95) ($96) ($96) ($97) ($97) ($97) ($97) Customer Impact over Base Option - Option 4 (Excessive Use Charge) Customer Class Residential $0 ($7) ($6) ($5) ($4) ($4) ($4) ($4) ($4) ($4) ($4) ($4) ($4) ($4) ($4) ($4) ($4) Commercial/Industrial $0 ($33) ($29) ($23) ($17) ($18) ($18) ($18) ($18) ($18) ($18) ($18) ($18) ($18) ($18) ($18) ($18) Institutional $0 ($175) ($153) ($124) ($93) ($93) ($93) ($94) ($94) ($95) ($95) ($96) ($96) ($97) ($97) ($97) ($97)

136 APPENDIX N Projected Base Charges and Consumption Rates

137 Appendix N: Projected Base Charge And Consumption Rates ( ) Projected Base Charges by Class for the Years Customer Class Annual % Increase 8.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Residential $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Commercial $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Industrial $ $ $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, Institutional $2, $2, $2, $2, $2, $2, $2, $2, $2, $2, $2, $2, $2, $2, $2, $2, $2, Projected Consumption Water Rates for the Years Description INCREASING BLOCK RATE (Residential Users all Year Round) Annual % Increase 6.0% 4.0% 1.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Block 1 $1.91 $2.02 $2.10 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 Block 2 $0.00 $3.03 $3.15 $3.17 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18 $3.18

138 APPENDIX O Requirements of Ontario Regulation 453/07

139 Appendix O: Requirements of O.Reg. 453/07 Requirements 1. The financial plans must be approved by a resolution that is passed by, i. The council of the municipality, if the owner of the drinking water system is a municipality. ii. The governing body of the owner, if the owner of the drinking water system has a governing body and is not a municipality. 2. The financial plans must apply to a period of at least six years. 3. The first year to which the financial plans must apply must be the year determined in accordance with the following rules: How Requirements are Met This will be sent under separate cover following approval of the Financial Plan by the Town of Niagara-on-the-Lake Council N/A Applies for 6 years from 2015 to 2020 inclusive. i. If the financial plans are required by subsection 2, the first year to which the financial plans must apply must be the year in which the drinking water system s existing municipal drinking water licence would otherwise expire. ii. If the financial plans are required by a condition that was included in a municipal drinking water licence under subsection 1 (3), the first year to which the financial plans must apply must be the later of 2010 and the year in which the first licence for the system was issued. 4. Subject to subsection (2), for each year to which the financial plans apply, the financial plans must include the following: i. Details of the proposed or projected financial position of the drinking water system itemized by: The licence expiry for both water systems (No & No ) is April 15, Therefore, the first year of the Financial Plan is N/A See Table 4-1 Statement of Financial Position for both water systems combined in Financial Plan. a. Total financial assets See Table 4-1 Statement of Financial Position for both water systems combined in Financial Plan. b. Total liabilities See Table 4-1 Statement of Financial Position for both water systems combined in Financial Plan. c. Net financial assets (debt) See Table 4-1 Statement of Financial Position for both water systems combined in Financial Plan. d. Non-financial assets that are tangible capital assets, tangible capital assets under construction, inventories of supplies and prepaid expenses. See Table 4-1 Statement of Financial Position for both water systems combined in Financial Plan. TCA Projections in Financial Plan.

140 Appendix O: Requirements of O.Reg. 453/07 e. Changes in tangible capital assets that are additions, donations, write downs and disposals. See Table 4-1 Statement of Financial Position for both water systems combined in Financial Plan. TCA Projections in Financial Plan. ii. iii. Details of the proposed or projected financial operations of the drinking water system itemized by, a. Total revenues, further itemized by water rates, user charges and other revenues. b. Total expenses, further itemized by amortization expenses, interest expenses and other expenses See Table 4-2 Statement of Operations for both water systems combined in Financial Plan. See Table 4-2 Statement of Operations for both water systems combined in Financial Plan. See Table 4-2 Statement of Operations for both water systems combined in Financial Plan. c. Annual surplus or deficit, and See Table 4-2 Statement of Operations for both water systems combined in Financial Plan. d. Accumulated surplus or deficit See Table 4-2 Statement of Operations for both water systems combined in Financial Plan. Details of the drinking water system s proposed or projected gross cash receipts and gross cash payments itemized by, See Table 4-3 Statement of Cash Flow for both water systems combined in Financial Plan. a. Operating transactions that are cash received from revenues, cash paid for operating expenses and finance charges, - done in full cost report See Table 4-3 Statement of Cash Flow for both water systems combined in Financial Plan. b. Capital transactions that are proceeds on the sale of tangible capital assets and cash used to acquire capital assets, See Table 4-3 Statement of Cash Flow for both water systems combined in Financial Plan. c. Investing transactions that are acquisitions and disposal of investments, d. Financing transactions that are proceeds from the issuance of debt and debt repayment. e. Changes in cash and cash equivalents during the year, f. Cash and cash equivalents at the beginning and end of the year. See Table 4-3 Statement of Cash Flow for both water systems combined in Financial Plan. See Table 4-3 Statement of Cash Flow for both water systems combined in Financial Plan. See Table 4-3 Statement of Cash Flow for both water systems combined in Financial Plan. See Table 4-3 Statement of Cash Flow for both water systems combined in Financial Plan. iv. Details of the extent to which the information described in subparagraphs i, ii and iii relates directly to the replacement of lead service pipes as defined in section of Schedule 15.1 to Ontario Regulation 170/03 (Drinking Water Systems), made under the Act. There are no lead service pipes to be changed in the Town of Niagara-on-the-Lake. Therefore, the information in the Financial Plan does not include lead services pipe replacement. 5. The owner of the drinking water system must. i. Make the financial plans available, on request, to members of the public who are served by the drinking water system without charge, This will be done by the Town of Niagara-on-the- Lake following Council approval.

141 Appendix O: Requirements of O.Reg. 453/07 ii. Make the financial plans available to members of the public without charge through publication on the Internet, if the owner maintains a website on the Internet, The Financial Plan will be posted on the Town of Niagara-on-the-Lake s website and made available for public review at no charge. iii. Provide notice advising the public of the availability of the financial plans under subparagraphs i and ii, if applicable, in a manner that, in the opinion of the owner, will bring the notice to the attention of members of the public who are served by the drinking water system. 6. The owner of the drinking water system must give a copy of the financial plans to the Ministry of Municipal Affairs and Housing. O. Reg. 453/07, s. 3 (1). Each of the following sub-subparagraphs applies only if the information referred to in the subsubparagraph is known to the owner at the time the financial plans are prepared. A notice will be issued following Council approval. Will be submitted following Council approval. The Financial Plan was prepared using available information at the time of preparation and may not contain all desired items. Reasonable assumptions were made and these are noted in the Financial Plan. 1. Sub-subparagraphs 4 i A, B and C of subsection (1). The Financial Plan was prepared using available information at the time of preparation and may not contain all desired items. Reasonable assumptions were made and these are noted in the Financial Plan. 2. Sub-subparagraphs 4 iii A, C, E and F of subsection (1). O. Reg. 453/07, s. 3 (2). The Financial Plan was prepared using available information at the time of preparation and may not contain all desired items. Reasonable assumptions were made and these are noted in the Financial Plan.

142 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Appendix E: Wastewater Rate Study PwC

143 TOWN OF INNISFIL Wastewater Rate Study and Financial Plan April 15, 2015 dfa DFA Infrastructure International Inc.

144 Wastewater Rate Study and Financial Plan April 15, 2015 Table of Contents Transmittal Letter Table of Contents 1 Introduction Background Purpose Regulatory Requirements Provincial Regulations Methodology Full Cost Considerations Full Cost Assessment Rate Design Guiding Principles Rate Structures and Qualitative Analysis of Options Data Sources Customer Growth Current Wastewater Customers Customer Growth Projections Wastewater Volume Projections Billed Wastewater Volumes Wastewater Billing Volume Projection Tangible Capital Assets (TCA) Capital Budget Requirements Debt Financing Reserve Fund Requirements Operations & Maintenance (O&M) Cost Projections Rate Stabilization Reserve Full Cost of Wastewater Evaluation of Rate Structure Options Rate Structure Options Proposed Wastewater Base Charges Proposed Consumption Wastewater Rates By Rate Structure Option Customer Impacts Residential Customer Impacts Commercial Customer Impacts Institutional Customer Impacts Average Customer Bill Impact Preferred Rate Structure Option Projected Wastewater Rates i DFA Infrastructure International Inc.

145 Wastewater Rate Study and Financial Plan April 15, Wastewater System Financial Plan Financial Statements Statement of Financial Position Statement of Operations Statement of Cash Flow Conclusions & Recommendations References Appendices Appendix A: Wastewater Rate By-Law Appendix B: Qualitative Analysis of Rate Structure Options Appendix C: Customer Growth Projections Appendix D: Wastewater Billing Volume Projections Appendix E: Capital Forecast Appendix F: Reserve Projections Appendix G: Operations & Maintenance Projections Appendix H: Base Charge Projections Appendix I: Consumption Wastewater Rate Projections Appendix J: Residential Customer Impacts Appendix K: Commercial Customer Impacts Appendix L: Institutional Customer Impacts Appendix M: Customer Impacts Over Base Option Appendix N: Projected Base Charges and Consumption Rates Appendix O: Requirements of Ontario Regulation 453/07 Tables Table 3-1: Cost Components and Drivers Table 3-2: Data Sources Table 4-1: Current Wastewater Customer Accounts Table 4-2: Customer Growth Projection Table 5-1: 2014 Billed Wastewater Volumes Table 5-2: Wastewater Billing Volume Projection Table 6-1: Asset Amortization and 2015 Net Book Value (NBV) Table 6-2: Asset Replacement Needs Table 9-1: Average Annual Full Cost of Managing the Wastewater System Table 10-1: Total Billed Wastewater Flows Above Threshold Table 10-2: Residential Billed Wastewater Flows Above Threshold Table 10-3: Seasonal Billed Wastewater Flows Above Threshold Table 10-4: Proposed Base Charge By Customer Type Table 10-5: Proposed Consumption Wastewater Rates for the Years Table 10-6: Residential Customer Impacts for the Years Table 10-7: Commercial Customer Impacts for the Years ii DFA Infrastructure International Inc.

146 Wastewater Rate Study and Financial Plan April 15, 2015 Table 10-8: Institutional Customer Impacts for the Years Table 10-9: Customer Impact Over Base Option for the Years Table 10-10: Summary of Qualitative Analysis of Rate Structure Options Table 10-11: Projected Base Charges ( ) Table 10-12: Projected Consumption Water Rates ( ) Table 11-1: Statement of Financial Position Table 11-2: Statement of Operations Table 11-3: Statement of Cash Flow Figures Figure 6-1: 2015 Wastewater Systems Value in 2015 Dollars Figure 7-1: Wastewater Capital Reserve Closing Balance Projections ( ) Figure 7-2: Wastewater Development Charges Reserve Closing Balance Projections ( ) Figure 7-3: Asset Life Cycle Reserve Fund (for Asset Replacement Beyond 2031) Figure 8-1: Rate Stabilization Reserve Figure 9-1: Annual Wastewater Costs iii DFA Infrastructure International Inc.

147 Wastewater Rate Study and Financial Plan April 15, Introduction 1.1 Background The provides wastewater services to approximately 9400 customers through its Lakeshore Wastewater Treatment Plant (WWTP) and the Cookstown Wastewater System. The Lakeshore WWTP was built in 1987 with a treatment capacity of 7,185 m³ per day which was doubled in 1996 to 14,400 m³ per day. The Town is considering expanding the plant capacity to 40,000 m³ per day to meet future wastewater treatment needs. Wastewater is collected and transmitted to the Lakeshore Wastewater Treatment Plant for treatment via seven (7) pump stations, approximately 110 km of gravity sewers and 9.9km of force main. The Cookstown WWTP was built in 1987 with a capacity of 825 m³ per day. This collection system consists of approximately km of gravity sewers which transmit the wastewater to the plant for treatment. The plant effluent is discharged from two (2) retention ponds via approximately 1.48 km of forcemain to Innisfil Creek. The Town is also undertaking inflow and infiltration reduction measures to reduce the volume of storm water entering the respective systems and treated at the two (2) WWTPs. DFA Infrastructure International Inc. (DFA) was retained by the Town to prepare wastewater rate study that covers both wastewater systems. This includes an assessment of the full costs of managing the wastewater systems and recovery of those costs through rates and charges. As wastewater rates and charges are heavily connected to billed water consumption, this study also includes a review of alternative conservation-oriented rate structures for consideration by the Town. The study period is for seventeen (17) years from 2015 to 2031 inclusive. Although there is no regulatory requirement to prepare a Wastewater Financial Plan, the Town also wishes to update their financial plan for the wastewater system, similar to the O.Reg 453/07 Financial Plan required for the water distribution systems. This is consistent with best practise and meets the intent of the Water Opportunities and Conservation Act, This document also presents the updated wastewater system financial plan. 1.2 Purpose The primary purpose of this water rate study and financial plan is to: Identify the full costs of managing the Town s wastewater service to customers based on the most recent available information; Update the Town s current rates and charges to its customers, using the current structure of a base charge and uniform consumption rate per cubic metre that will recover the full costs of collection and treatment of wastewater from customers as a Base Option; Evaluate and compare alternative conservation-oriented rate structures against the Base Option, and recommend a preferred rate structure and rates for the recovery of the full costs of collecting and treating wastewater from customers 1 DFA Infrastructure International Inc.

148 Wastewater Rate Study and Financial Plan April 15, 2015 Present the information necessary for preparing a wastewater system financial plan in accordance with the requirements of Ontario Regulation 453/07 and the Safe Drinking Water Act Regulatory Requirements 2.1 Provincial Regulations Provincial requirements governing wastewater services primarily include the following: The Environmental Assessment Act (EAA); The Municipal Act (MA); The Development Charges Act (DCA); The Sustainable Water and Sewage Systems Act, 2002 (SWSA); and The Water Opportunities and Conservation Act, 2010 (WOA). The EA Act applies to expansion of existing facilities and establishment of new capacity such as the installation of new pipes to service growth in customers. The Municipal Act, Part VII, Section 293 requires municipalities to establish reserves for dealing with long-term liabilities. This applies directly to the wastewater systems and the future liabilities associated with their age and condition. The Municipal Act also permits the municipalities to establish fees for cost recovery and requires public input prior to any fee adjustments. The Development Charges Act and regulations establishes the requirements for the recovery of portions of future growth related capital expenditures to be incurred by municipalities. The Water Opportunities and Conservation Act, 2010 is the most recent legislation to be enacted influencing water system management. It requires sustainability plans to be prepared for water systems and overlaps somewhat with the SWSA. The Water Opportunities and Conservation Act, 2010 The WOA was enacted in November 2010 and the regulations are pending. While there are no regulations that mandate the preparation of financial plans for wastewater systems, the Water Opportunities and Conservation Act, 2010 promotes water conservation and inflow and infiltration reduction and requires municipalities to develop: Water conservation plans; Sustainability plans for water, wastewater & storm water management; and Asset management plans for water and wastewater systems among other asset classes. Financial plans are required components of the wastewater sustainability and asset management plans. Therefore municipalities are now preparing wastewater financial plans that are similar to those required for water systems in accordance with O.Reg. 453/07. This includes preparing the following for wastewater systems: A Statement of Financial Position; 2 DFA Infrastructure International Inc.

149 Wastewater Rate Study and Financial Plan April 15, 2015 A Statement of Cash Flow; and A Statement of Operations. Appendix O lists each requirement of the regulation and references the respective financial statements and other items that contain relevant information required under each item. The financial plan applies to a period of six (6) years from 2016 to 2021 to be consistent with the regulation. It is anticipated that the financial plan would be made available to the public at no charge and posted on the Town s website following final approval of the rate study and financial plan by Town Council. The By-laws The By-law No established the wastewater rates and charges that apply to the various customers classes in An excerpt of the by-law showing the 2015 wastewater rates and charges is attached in Appendix A. 3 Methodology The Rate Study gives consideration to the full costs (or the required investment) associated with managing the wastewater systems over a seventeen (17) year period from 2015 to 2031 inclusive and the recovery of costs (or revenue plan) through proposed rates and charges to customers. Life cycle costs of assets are also considered well beyond the 17-year period to determine the full replacement and/or rehabilitation needs given that some wastewater system assets (e.g. Water Pollution Control Plants/Lagoons) can have life expectancies in the 75 to 100 year range. A qualitative analysis of potential rates structures is also undertaken in relation to guiding rate design principles to identify rate structure options to be assessed. This qualitative analysis was reviewed with Town staff prior to selection of a short list of rate structures. It should be noted that in evaluating rate structure options for wastewater, the rate structure option analysis undertaken for water is referenced as the recovery of wastewater cost form part of the water bill, and as a consequence increase the economic incentive for conservation. Rates under selected rate structure options are compared and evaluated and a preferred rate structure and rates recommended. 3.1 Full Cost Considerations Calculation of the Town s full cost of managing the wastewater systems is based on estimating and projecting the annual costs (in 2015 dollars), related to the primary activities required to deliver wastewater services to customers. Higher costs are generally expected in the future as the wastewater business environment changes. However, the impact can be mitigated by fully understanding, assessing and planning for future wastewater system costs. Determination of the full cost of managing the Town s wastewater systems takes into account the factors that have a bearing on the cost of providing a reliable wastewater services to the customers over the long-term. These included both current and future considerations that would influence the cost of managing the system (and the revenues required to sustain them). Table 3-1 notes the main drivers of cost. The assumptions made are noted in the respective sections of this report. 3 DFA Infrastructure International Inc.

150 Wastewater Rate Study and Financial Plan April 15, 2015 Table 3-1: Cost Components and Drivers Cost Component Cost Drivers Future Cost Implications Wastewater systems operations and maintenance (O&M) This is the annual cost of operating and maintaining the current system including direct (e.g. operations staff) and indirect costs (e.g overhead, charge backs etc). Changes in regulations can result in additional (O&M) activities and added costs. It is expected that pending regulations under the Water Opportunities Act and greater enforcement of compliance requirements by the Ministry of the Environment and Climate Change (MOECC) would require more actions to be undertaken (and increased costs) by municipalities This is a direct annual cost that is reasonably consistent (fixed) from year to year but requires adjustment to account for non-recurring items, operational changes, variable cost (e.g. chemical use) changes and inflation. Non-rate revenues from administrative fees and grants offset these costs. The long term impact of new regulations on costs are difficult to predict. However, the costs are expected to rise as more stringent requirements are established and compliance enforcement by the MOECC increases. Customer Growth Water Consumption Volume (m 3 ) that applies to Wastewater New growth related services As the existing urban areas are developed, the addition of new customers would increase the total demand for water. A corresponding rise in wastewater volume requiring treatment would also be expected. Water consumption is a function of the number of customers (existing and new growth), weather conditions and the economic environment. The weather conditions have a significant influence on how much water is consumed and wastewater generated in a given year. For example, lower temperatures and wet weather tend to result is less water consumption. Dry weather and higher temperatures increase water consumption. Wet weather would also mean more storm water enetring the wasetwater system (known as inflow and infiltration). The loss of large (commercial or industrial) customers perhaps due to economic climate would reduce demand. This refers to installation of new assets to increase the system capacity to facilitate new development and build out of the approved service areas within the Town. The increase in wastewater generation, if significant, would increase volumes to be collected and treated and result in additional variable costs in the year the new customers are added. The annual consumption volume is unpredictable. Fluctuations can result in higher than anticipated costs or lower revenues and lead to budget deficits. There is the need for contributions to an operating reserve to minimize the risk of deficits and stabilize rates (i.e. minimize rate spikes) Would result in capital investments in the year the new infrastructure is needed. Note that financing of these costs can be through debt or cash from reserves after third party contributions are considered (e.g. grants, developer contributions etc.). The Town has indicated that debt is not a preferred option at this time due to the current debt load. Asset preservation and renewal This is mainly the replacement of aging Tangible Capital Assets (TCA) e.g. old wastewater pipes, plant components, pump station conponents etc. that have exceeded their service life. Would result in future capital expenditures in the year in which the assets require replacement or rehabilitation to extend their useful lives. Allowances must be made as 4 DFA Infrastructure International Inc.

151 Wastewater Rate Study and Financial Plan April 15, 2015 Cost Component Cost Drivers Future Cost Implications part of the annual costs to account for the future replacement of these assets Financing can be through a combination of debt and reserve funds. However, this study assumes no future debt based on discussion with Town staff. Projections are done for the 17- year period and also beyond Other capital expenditures These are capital expenditures other than those needed for growth and asset renewal. These would include cost of studies and implementation of operational improvements of the wastewater system such as I&I reduction programs. Capital Financing Capital financing for projects can be from four (4) main sources: Debt financing, reserves, annual rates and third party contributions (grants etc.). Grant funding is available only when approved and is therefore not a predictable source of financing for financial planning purposes. The greater the debt financing, the higher the annual amount (costs) needed to repay the principal and interest on any current or future debt. Financing from reserves can only be used if sufficient funds are available. Therefore annual contributions to reserves are required to build balances for use in future years. Would increase costs in the year the expenditure is required. Financing can be through a combination of debt and reserves. However, this study assumes no future debt based on discussion with Town staff. Annual costs would increase to provide for reserve contributions and debt repayment. It should be noted that using debt financing would minimize spikes in funding required for capital projects and allocates cost to future users. However no debt repayment is projected in the Town s case. Inflation Market competition and pricing This is the annual rate of inflation as reported by Statistics Canada or the provision for cost of living adjustments each year. The level of competition within the market place depends on the number of service providers available. Additionally, the capacity of industry service providers to meet the increasing demand for their services may tend to increase prices. Tender prices for future capital projects would be influenced by the market conditions at the time of tendering. Would result in annual cost increases. Potential higher prices depending on the future behaviour of the industry. 3.2 Full Cost Assessment The full cost assessment identifies the current and future costs (i.e. the full costs) associated with the management of the wastewater system over the next seventeen (17) years (2015 to 2031). The key cost areas include: Operations & Maintenance (O&M) cost projections; Capital Budget based on the approved capital forecast; 5 DFA Infrastructure International Inc.

152 Wastewater Rate Study and Financial Plan April 15, 2015 Tangible Capital Asset (TCA) projections including asset replacement needs; Debt servicing requirements; and Reserve fund requirements. The non-rate revenues associated with the systems are also identified. These are defined as revenues that are routinely generated each year by the daily operations and include administrative revenues such as service fees, penalties, operating grants, etc. It is important to note that the non-rate revenues do not include the revenues generated by the wastewater rates (i.e. from the sale of water to customers that receive wastewater services). The full costs developed through the various analyses in this study identify the revenue requirements for the wastewater systems and form the basis for the future rates and charges. 3.3 Rate Design Guiding Principles The following are the underlying rate design guiding principles that were considered and approved by senior staff in identifying rate structure options to be considered for rate development. Specific emphasis was given to the principle of Reduce wasteful uses of water as the Town s Water Conservation and Efficiency Strategy recommended that the Water and Wastewater Rate Study evaluate and consider the use of conservation-oriented pricing structures: 1. Full Cost Recovery The full costs of managing water and wastewater systems should be recovered through the rates and charges to sustain adequate financing for the water and wastewater systems in the future including asset replacement based on life cycle costs (consistent with Sustainable Water & Sewer Systems Act, 2002 & Water Opportunities Act 2010); 2. Reduce Wasteful Uses of Water - This promotes water conservation and encourages customers with peak demands that are significantly higher than their normal demands to reduce consumption (consistent with requirements of the Water Opportunities Act, 2010); 3. Fairness and Reasonableness (avoid discrimination) - The rate structure should not unduly benefit or adversely affect one customer class over another; 4. Ease of Administration - Rate structure should be simple; this would serve to minimize administration costs and facilitate easy understanding by customers; 5. Stability Major fluctuations in the rates and charges from year to year should be avoided by establishing and utilizing a rate stabilization reserve fund. The rates should also provide predictability in terms of revenues each year i.e. the portion of revenues from fixed and/or base charges should be sufficient to reduce risk of running deficits; 6. Industry Promotion All industries will be treated equitably with no specific incentives for a particular industry. The Town may wish to support economic growth by providing some incentives in the rate structure; and 7. Future Debt to be Avoided Debt financing of the future capital replacement projects related to the wastewater system should be avoided, reserves should be established but not unduly overbuilt. 6 DFA Infrastructure International Inc.

153 Wastewater Rate Study and Financial Plan April 15, Rate Structures and Qualitative Analysis of Options The following rate structure options are evaluated in relation to the above underlying rate design guiding principles (all options except Fixed Fee and Uniform Charge are assumed to include a base charge component).: 1. Fixed Fee A single flat fee that applies to all customers; 2. Uniform Charge Constant volumetric charge that applies to all customers; 3. Uniform (with Base Charge) Constant volumetric charge and base charge (the Town s existing rate structure and most common in Ontario); 4. Declining Block Volumetric charge that decreases as water use (billed wastewater volume) increases; 5. Increasing Block Volumetric charge that increases as water use (billed wastewater volume) increases; 6. Seasonal Charge Volumetric charge that is higher only for water used (bill wastewater volume) during the peak water demand season; and 7. Excess Use Charge Volumetric charge that is higher for all demand during the peak water demand season in excess of a threshold. A qualitative analysis of the rates structure options is undertaken in relation to the guiding rate design principles to identify rate structures to be further assessed. The qualitative analysis of the rate structure options can be found in Appendix B. Based on the results of the qualitative analysis four (4) rate structure options were recommended by senior staff for further consideration and analysis. Rates under the rate structure options are compared and evaluated in Section 10 of this report and a preferred rate structure and rates are recommended. 3.5 Data Sources The primary sources of data used to prepare this rate study and financial plan are listed in Table 3-2. In addition, information was also developed from discussions with input from Innisfil s staff, as required. Table 3-2: Data Sources Item Data Source Asset Life Expectancy Town s TCA Policy Information Provided by the Town Asset Replacement Costs Town s TCA Policy Town s Asset Management Plan Historical Costs Provided by the Town indexed to 2015 Asset Values Town s TCA Policy Town s Asset Management Plan Information Provided by the Town 7 DFA Infrastructure International Inc.

154 Wastewater Rate Study and Financial Plan April 15, 2015 O & M Costs and Revenue Projections Town s 2015 Wastewater Operating Budget Capital Cost Projections Town s 2015 Wastewater Capital Budget and Forecast Debt Information provided by the Town Town s 2015 Wastewater Operating Budget and Capital Budget Forecast Investments, Reserve balances etc. Information provided by the Town Existing Customers Town s Customer count Provided by InnPower Growth Information Provided by the Town including DC Revenue Projections Water Volumes Town s actual historical Consumption Volumes and Estimates for 2013 and 2014 provided by InnPower 4 Customer Growth The cost of service depends on the number and type of (residential, commercial, industrial and institutional) customers and corresponding water demand which influences wastewater generation. Although most costs are fixed, variable costs such as annual chemical use and hydro costs can increase depending on the level of customer growth and water consumption. Capital costs related to increasing system capacity to accommodate customer growth can also be influenced by growth and demand. In addition, all rate structure options considered in this study are comprised of a fixed (base charge) per customer plus a consumption charge based on the metered volume of water consumed (wastewater billed). Therefore forecasting customer growth and annual water consumption volumes (billed wastewater volumes) by customer type are essential to projecting future costs, revenue requirements and rates for wastewater. 4.1 Current Wastewater Customers There are approximately 9,400 current wastewater customer accounts based on information provided by InnPower. This number is expected to increase significantly over the forecast period. Table 4-1 shows the current total number of customers including non-residential customers by class. Table 4-1: Current Wastewater Customer Accounts 2015 Wastewater Customer Accounts Wastewater Customer by Type Metered Flat Rate Total Residential 1 7,820 1,412 9,232 Commercial/Industrial Residential Mixed Use Intitutional Total 7,928 1,437 9,365 (1) Includes 1233 Sandy Cove equivalent metered units 8 DFA Infrastructure International Inc.

155 Wastewater Rate Study and Financial Plan April 15, Customer Growth Projections Table 4-2 shows the increase in total customers over the forecast period. Customer growth projections reflect the residential customer growth contained in Innisfil s 2013 Development Charges Background Study prepared by Hemson Consulting. Adjustments to these projections have been made to recognize the deferral of Friday Harbour s 1600 unit development from to Projected residential customer growth over the forecast period is 10,686 new residential units, with projected annual residential customer growth ranging from a low of 190 new residential customers in 2015, to a high of 1014 new residential customers in Non-residential customer growth is also derived from the 2013 Development Charges Study. Projected employment growth is converted to reflect forty-five (45) new commercial and three (3) new industrial customers over the forecast period. There is no projected growth in institutional customers. Detailed customer growth projections by customer class can be found in Appendix C. Table 4-2: Customer Growth Projection Wastewater Customer Growth Projection Customers Residential Non-Residential Total Number of Customers 9,557 11,781 16,033 20,291 5 Wastewater Volume Projections 5.1 Billed Wastewater Volumes Table 5-1 details the estimated 2014 water consumption (and therefore billed wastewater volumes) by wastewater customer class based on the billing records provided by InnPower, and the average billed volume per wastewater customer class. There were on average approximately 7795 metered wastewater customers that consumed approximately 1,441,969 m 3 of water for the year. Residential wastewater customers, including Sandy Cove and Residential Mixed Use, accounted for 94% of the wastewater billed volumes and non-residential 6%. The average residential and non-residential billed volumes were approximately 185 m 3 / year and 944 m 3 / year, respectively. Customer Class Table 5-1: 2014 Billed Wastewater Volumes Ave # of Metered Customers Estimated Total Billed Volumes Average Billed Volume (m 3 ) / Customer Residential 1 7,686 1,339, Commercial/Industrial 74 65, Residential Mixed Use 29 11, Institutional 6 25,560 4,260 (1) Includes 1233 Sandy Cove equivalent metered units 2014 Billed Wastewater Volumes 9 DFA Infrastructure International Inc.

156 Wastewater Rate Study and Financial Plan April 15, Wastewater Billing Volume Projection It is important for the water consumption projections (billed wastewater volumes) to be reasonably conservative so that revenue projections are not unduly overestimated (leading to potential annual deficits). The process and assumptions used to estimate the volume of water to be consumed by wastewater customer each year over the study period include the following: Consideration of the Town s commitment to water conservation through development and approval of a Water Conservation and Efficiency Strategy. This strategy was approved in 2014 and provides key initiatives to reduce consumption and water loss. To reflect the impact that these initiatives have to reduce the consumption of water, the water consumption projection (billed wastewater volume projections) assumes that the consumption rate (i.e. m 3 consumed per customer) would decline over time. A reduction of 2% per year in consumption per customer is assumed until 2019, after which the consumption/customer would stabilize and remain constant for the remainder of the study period. Applying the calculated consumption rate per customer to the respective number of wastewater customers in each class to arrive at the annual consumption volumes projection for each year. The volume of water projected to be consumed by wastewater customer over the study period is presented in Appendix D. Based on the growth projections and the assumptions made, Innisfil s water consumption for wastewater billing purposes is projected to increase from 1,469,322 m 3 in 2015 to 3,063,440 m 3 by The wastewater billing volume projections by customer class are shown below in Table 5-2. Table 5-2: Wastewater Billing Volume Projection Wastewater Billing Volume Projections Customer Class Residential 1,367,592 1,378,819 1,401,025 1,431,161 1,463,082 1,530,662 1,602,632 1,674,602 Commercial/Industrial 65,536 65,911 66,214 66,446 66,606 69,014 70,619 72,224 Residential Mixed Use 11,145 10,918 10,690 10,463 10,235 10,235 10,235 10,235 Institutional 25,049 24,538 24,026 23,515 23,004 23,004 23,004 23,004 Total Project Consumption 1,469,322 1,480,185 1,501,955 1,531,585 1,562,927 1,632,915 1,706,490 1,780,065 6 Tangible Capital Assets (TCA) The depreciation (amortization) of existing assets is a non-cash annual cost that reflects the annual use of assets until the end of their respective useful lives. Therefore, allowances must be made to finance the replacement and/ or rehabilitation of the existing assets once they expire and can no longer play a role in providing the required wastewater collection and treatment services to customers. However, it should be noted that since depreciation is based on the original (historical) cost at the time the asset was placed in service it does not account for inflation since the year of installation. Therefore, basing asset replacement costs on depreciation alone is not sufficient to cover the future replacement needs. Accordingly, cost estimates based on indexing the historical costs to the replacement year are used in projecting future asset replacement costs. TCA data contained in the Town s 2014 Asset Management Plan (updated to include Infrastructure Investments contained in the 2014 Capital Budget) was used to develop the financial information and asset replacement projections related to the Water System. The TCA projections are based on the following assumptions: 10 DFA Infrastructure International Inc.

157 Wastewater Rate Study and Financial Plan April 15, 2015 Amortization of existing assets is based on the Town s Tangible Capital Assets Policies and Procedures. Amortization of new assets is based on straight line depreciation with full year depreciation charged in the year of acquisition; Historical costs, life expectancy and remaining useful life as per the TCA data provided by the Town; Replacement costs are based on indexing historical costs to the year of replacement using the appropriate Construction Price Indices; Fully depreciated assets continue to be used in service i.e. no asset removals; and New assets to be acquired are based on the capital forecast presented in Appendix E. The forecast includes projects in the Town s Capital Budget Forecast and asset replacement projections based on TCA analysis undertaken as part of the rate study. Asset Value The wastewater systems are comprised of the following asset classes: Sanitary Sewers/Manholes; Sanitary Forcemains; Pump Stations; and Water Pollution Control Plant/Lagoons. Table 6-1 shows the current asset value based on historical cost and accumulated amortization to This is reflected as the net book value (NBV) i.e. the accounting value, and indicates that the wastewater system as a whole is approximately 27% depreciated or has approximately 73% remaining life based on the TCA data. This suggests that the wastewater system assets are relatively new. Table 6-1: Asset Amortization and 2015 Net Book Value (NBV) 2015 Wastewater Asset Details Historical Cost 67,774, % Accumulated Amortization 18,620,064 27% Net Book Value (2014) 49,154,317 73% The NBV of the wastewater system does not truly represent the cost of asset replacement as previously noted. The total replacement value (in 2015) of the assets, not including land (as land is not a depreciable asset) is estimated to be $103,608,995 using historical costs inflated to 2015 dollars. As shown in Figure 6-1, approximately 50% of asset values are in the lagoons and the water pollution control plants. 11 DFA Infrastructure International Inc.

158 Wastewater Rate Study and Financial Plan April 15, Wastewater Asset Value $40,136,966, 39% $51,593,062, 50% Sanitary Sewers/Manholes Sanitary Forcemains Pump Stations WPCP/Lagoons $7,944,575, 7% $3,934,392, 4% Total Replacement Value = $103,608,995 Required Renewal within 17 Years = $7,550,831 Required Renewal Beyond 17 Years = $96,058,164 Figure 6-1: 2015 Wastewater Systems Value in 2015 Dollars Asset Replacement Needs A TCA analysis based on asset information contained in the Town s 2014 Asset Management Plan was completed to determine the future assets replacement needs. This involved consideration of the following information for the respective assets: Historical cost; In- service or year of installation; Useful life expectancy and anticipated year of replacement; Replacement costs in 2015 dollars (developed by applying the appropriate historical Construction Price Indices to the historical costs); and Replacement costs in the future year of replacement (estimated by adjusting 2015 replacement costs using 2% inflation). The asset replacement and/ or rehabilitation requirements resulting from the analysis are summarized in Table 6-2. This shows that approximately $7.6 million is required over the next 17 years. Approximately $96 million is required beyond 2031 primarily for replacement of sanitary sewers and the water pollution control plant. The annual asset replacement requirements between 2015 and 2031 are presented in Appendix E as part of the overall capital requirements for the study period. It is important to note that although these projections include review of the asset life expectancies noted in the PSAB 3150 TCA inventory from an engineering perspective, they do not consider the true current condition of the assets. Condition assessments may indicate that some assets could continue in service beyond their anticipated 12 DFA Infrastructure International Inc.

159 Wastewater Rate Study and Financial Plan April 15, 2015 life expectancy provided that certain maintenance and rehabilitation work is done. In such cases, replacement of the asset would be deferred to a later date than projected in this study. The reverse is also true where problematic assets may need to be replaced earlier than expected. Wastewater Assets Total Replacement Costs Table 6-2: Asset Replacement Needs 2015 Asset Replacement Needs Amount to be Funded in Forecast Period Amount to be Funded Beyond Forecast Period Sanitary Sewers/Manholes $40,136,966 $5,711 $40,131,255 Sanitary Forcemains $3,934,392 $0 $3,934,392 Pump Stations $7,944,575 $7,545,120 $399,455 WPCP/Lagoons $51,593,062 $0 $51,593,062 Total Wastewater Assets $103,608,995 $7,550,831 $96,058,164 7 Capital Budget Requirements The future capital budget requirements are presented in Appendix E for the study period. This reflects the projects identified by the Town in their 2015 Capital Budget and 2016 to 2024 forecast, and the replacement of existing assets as they reach their respective useful lives. Approximately $152.3 million in capital expenditure is required between 2015 and It should be noted that some of the projects identified in the Capital Budget Forecast include asset replacement. Therefore these projects were rationalized with the projected asset replacement needs to ensure that there was no duplication in the 17-year projection. There are also a number of growth related projects included in the forecast that are needed to service the anticipated residential and non-residential growth in Innisfil. The two (2) most significant growth-related projects included are; Cookstown Wastewater Pollution Control Plant in 2017; and The Lakeshore Waste Water Treatment Plant Expansion in 2020 Appendix E also shows the projected sources of financing for the annual expenditures. Based on the rate design guiding principles noted in Section 3.3, capital financing will be mainly through cash from the capital reserve and developer contributions to partially fund the growth related projects noted above. While future debt financing is not considered at this time due to the Town s current debt load and available capacity. Debt financing and the reserve fund requirements are discussed in Sections 7.1 and 7.2, respectively. 7.1 Debt Financing Issuance of debt allows for financing to be available in the year the project is required and repayment occurs over the future years. This approach supports the principle of user pay in that the beneficiaries of the new asset pay for its use through the debt repayment. Financing from the capital reserve requires that sufficient funds be available in the reserve in the year the project is undertaken, through annual contributions to the reserve in prior years. Without debt or reserve financing, major rate increases or spikes would be required in the project year to raise sufficient funds to cover the project expenditures. However, as noted, financing future replacement projects through debt is not being considered at this time. It is possible that as the Town s circumstances change in the future debt financing may be considered at that time to offset reserve fund financing. 13 DFA Infrastructure International Inc.

160 Wastewater Rate Study and Financial Plan April 15, Reserve Fund Requirements There are three (3) capital related reserve funds for which projections are made for the study period: The Capital Reserve Fund; Development Charges Reserve Fund; and The Asset Life Cycle Reserve Fund (recommended for 2016 to begin allocation of funds for asset replacement beyond 2031). Appendix F shows the projected continuity schedule for each reserve. These show the transfers to and from the respective reserves and the opening and closing balances. Reserves are assumed to earn 1.3% annual interest on balances. Operating reserve requirements are discussed in Section 8. These reserve continuity schedules are for illustrative and quantitative analysis only, not specifically required for accounting and financial purposes. Capital Reserve Fund The Capital Reserve Fund, which is one of the primary sources of financing for projects, has a projected balance at the end of 2015 of approximately $10.1 million. It is proposed that internal borrowing be provided to the Water Capital Reserve to ensure that the Water Capital Reserve has sufficient funds to maintain a positive balance over the forecast period. The internal borrowing would diminish over the years when sufficient funds in the Water Capital Reserve are available. Approximately $4.4 million in financing will be required from this reserve between 2015 and Annual contributions to the Wastewater Capital Reserve (to be raised through the wastewater rates each year) over the next five (5) years are projected to be: 2015: $1,628,817; 2016: $1,349,104; 2017: $1,585,475; 2018: $771,745; and 2019: $393,022 As noted in Figure 7-1, the annual closing balance is projected to decrease slightly over the forecast period from approximately $10.1million in 2015 to approximately $9.9 million by This level of contributions and expenditures would maintain reserve balances of 9%-10%% of the asset value which places the Town in a very good position to fund capital works during the 17-year period. 14 DFA Infrastructure International Inc.

161 Annual Balance ($) Wastewater Rate Study and Financial Plan April 15, 2015 Wastewater Capital Reserve $12,000,000 $10,000, $10,066, $9,893,387 $8,000, $6,479,619 $6,000,000 $4,000, $3,395,992 $2,000,000 Year $ Figure 7-1: Wastewater Capital Reserve Closing Balance Projections ( ) Development Charges Reserve Fund Development Charges are fees imposed by the Town on new development and are the main source of funding for Innisfil s growth related capital program. Over $135 million is being provided from the Development Charges Reserve Fund towards funding growth related capital works over the forecast period. To ensure that sufficient funds are available to finance the growth related capital program it is assumed that the Town will arrange front-ended financing agreements to cash flow growth related funding needs over the forecast period. Approximately $120 million in front-end financing is identified between the years to ensure the Development Charge Reserve Fund maintains a positive balance. It should be noted that failure to secure front-end financing would require the issuance of debt or cause a delay in some growth related projects. The Development Charges Reserve Fund is projected to have a zero balance at the end As detailed in Figure 7.3 the Development Charge Reserve Fund balance is projected to increase to $1,923,261 by 2024, increasing further to $17,255,043 by The annual contributions to the Wastewater Development Charge Reserve Fund were provided by Town staff. Over the next five (5) years development charges collected are projected to be: 2015: $1,461,000; 2016: $1,545,010; 2017: $1,578,780; 15 DFA Infrastructure International Inc.

162 Annual Balance ($) Wastewater Rate Study and Financial Plan April 15, : $1,606,060 and; 2019: $1,571,740. $20,000,000 $18,000,000 $16,000,000 Wastewater Development Charges Reserve $17,255, $14,000,000 $12,000,000 $10,000,000 $8,000,000 Year $6,000,000 $4,000,000 $2,000,000 $- $(2,000,000) $- $2,968,017 $1,923, Figure 7-2: Wastewater Development Charges Reserve Closing Balance Projections ( ) Asset Life Cycle Reserve Fund This reserve fund is recommended for 2016 and is intended to facilitate building a reserve over the next 17 years to fund asset replacement beyond Contributions to this reserve fund would begin in 2018 and be phased in to reduce the impacts to the revenue required from rates. Contributions to the Capital Reserve Fund will decrease after 2017, as noted in Appendix F, at which time the contributions to Asset Life Cycle Reserve Fund would begin. No expenditures are projected from this reserve fund over the next 17 years because it is intended to finance asset replacement projects beyond Annual contributions of approximately $1.0 million in 2018, increasing to approximately $3.5 million by 2031 are projected. The annual closing balance is projected to increase from approximately $0.0 million in 2017 to approximately $38.5 million by 2031(as noted in Figure 7-4). This represents approximately 40% of the total asset replacement requirements beyond 2031 (refer to Section 6) and would place the Town in a reasonable position to fund replacement of its assets after DFA Infrastructure International Inc.

163 Annual Balance ($) Wastewater Rate Study and Financial Plan April 15, 2015 Wastewater Asset Replacement (>17 Years) Reserve $45,000,000 $40,000,000 $35,000,000 $30,000,000 Required to Finance Asset Renewal Beyond $38,495,715 Year $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 $ $ $2,545, $13,072, Figure 7-3: Asset Life Cycle Reserve Fund (for Asset Replacement Beyond 2031) 8 Operations & Maintenance (O&M) Cost Projections The annual operating budget is based on the operations and maintenance needs of the wastewater system which includes costs related to wastewater collection and treatment. These costs generally include the staffing, materials, utilities and other costs related to the following: Administration; Cookstown Wastewater Collection and Treatment System; Lakeshore Wastewater Collection and Treatment System, and; Fleet. Transfers to capital related reserves are typically included in the annual O&M budgets. These costs however are addressed separately for the purposes of the rate study and noted in Section 8.2. Transfers to a rate stabilization reserve are also included in the O&M budget as discussed later in this section. A portion of these O&M costs is offset by non-rate revenues. These generally include: Penalties and late payment charges; Administrative service fees and charges; Hauled waste revenues; and Government grants (when available). 17 DFA Infrastructure International Inc.

164 Annual Balance ($) Wastewater Rate Study and Financial Plan April 15, 2015 The projection of the gross costs and non-rate revenues over the study period is based on the Town s 2015 Operating Budget. The assumptions used in arriving at these projections are as follows: 2016 and 2017 values are based on the Town s operating budget forecast; 2018 and beyond, O&M costs (not including non-recurring costs and reserve transfers) will increase annually by 2%; In addition to inflationary increases, Hydro and Chemicals (variable costs) will increase by the percent increase in water consumption; No grants would be available to offset costs; and 2018 and beyond, recurring non-rate revenues will increase annually by 2%. Appendix G summarizes the gross operating costs, non-rate revenues and net costs to be recovered from users through the Town's base and consumption charges. The gross annual O&M costs are expected to increase from approximately $4.4 million in 2015 to $9.2 million by Rate Stabilization Reserve The Rate Stabilization Reserve is recommended for The establishment of a Rate Stabilization Reserve is considered a best practice and is required to provide a source of funding to offset any year-end operating deficits that may occur during the period and avoid rate increases ( spikes ) in the subsequent year. The annual contributions (to be raised through the wastewater rates each year) should be based on maintaining a balance of between 1.5% and 2% of total annual operating costs. A contribution of $31,529 is required to offset a projected deficit in Thereafter annual contributions of $15,000 are made to 2027 to generate a balance of $165,000, or 2.0% of annual operating costs. The reserve annual closing balances are as shown in Figure 8-1. $200,000 $150,000 Wastewater Rate Stabilization Reserve 2024 $120, $165,001 $100,000 $50, $(31,529) 2019 $45,001 $ Year $(50,000) Figure 8-1: Rate Stabilization Reserve 18 DFA Infrastructure International Inc.

165 Wastewater Rate Study and Financial Plan April 15, Full Cost of Wastewater The cost of managing the Town s wastewater systems over the next 17 years is reflected below in Figure 9-1. Table 9-1 is a summary of the projected gross costs for all the wastewater system cost components over the study period. It shows the annual average cost of approximately $6.6 million to manage the wastewater system over the next 17 years. This is equivalent to a unit cost of $3.05 per cubic metre per year based on an average billed consumption of 2,172,089 m 3 per year over the period. These annual costs reflect the average annual revenue requirements for the wastewater system to be recovered from non-rate revenue sources and the wastewater rates. Table 9-1: Average Annual Full Cost of Managing the Wastewater System Cost Component Average Annual Cost % $/m3 Capital Reserve Contributions $ 823, % $ 0.38 Asset Life Cycle Reserve Contributions (>17 years) $ 2,088, % $ 0.96 Rate Stabilization Reserve Contributions $ 11, % $ 0.01 O&M $ 3,707, % $ 1.71 Debt Repayment $ (0) 0.00% $ (0.00) Average Annual Cost $ 6,630, % $ 3.05 $10,000,000 Annual Wastewater Costs ($) $9,000,000 $8,000,000 Note: No Debt Assumed $7,000,000 $6,000,000 $5,000,000 Funding for Asset Renewal > 17 Yrs $4,000,000 $3,000,000 Asset Renewal < 17 Yrs $2,000,000 $1,000,000 Operations Year $ Figure 9-1: Annual Wastewater Costs 19 DFA Infrastructure International Inc.

166 Wastewater Rate Study and Financial Plan April 15, Evaluation of Rate Structure Options This section evaluates four (4) rate structure options that were identified in the qualitative analysis contained in Appendix B. Future rates necessary to meet the wastewater revenue requirements (i.e. to recover the full cost of managing the wastewater systems based on the assessment of system costs completed in the study) are calculated and compared for each option. As well, the customer impact of the rate structure options are also calculated and compared. A preferred rate structure option and rates are then recommended. It should be noted that all four (4) rate structure options that are considered for further analysis include the following two components: A Base Charge per Customer. This is a fixed charge to customers regardless of consumption (billed wastewater volumes). Higher charges apply to non-residential customers due to their respective water service and meter size (i.e. available capacity to these customers). This base charge structure is consistent with the American Water Works Association (AWWA) recommended concept for base charges now being adopted by many Ontario municipalities; and A Consumption Rate. This is a charge per cubic metre that applies to the volumes of water consumed (therefore volume of wastewater billed) as metered by the Town Rate Structure Options Based on the qualitative analysis contained in Appendix B the following four (4) rate structure options are given further consideration for analysis: Option1: Uniform Base Option - This option is the current structure used by the Town to recover wastewater costs and will be used as the Base Option against which all other options will be evaluated. Option 2: Increasing Block (All Users Year Round) This conservation-oriented rate structure option increases the economic incentive for conservation. It is not designed to recover the costs for building and operating the excess system capacity that would otherwise be needed to satisfy peak demands. Rather it is intended as an economic incentive to encourage users to conserve water (reduce wastewater generation) thereby deferring the need to increase system capacity. A two-block structure is considered, with the second block rate set a premium of 50% over the first block rate, and at a consumption level above 25m 3. The 25m 3 threshold will allow for the majority of essential water use to fall within the first block, and as such the higher second block will apply to discretionary water use only. As detailed in the Table 10.1, based on the average 2013 and 2014 monthly billed wastewater flow patterns approximately 13% of total annual billed wastewater flow is expected to fall within the second block under this option. It should be noted that wastewater flows associated from the Sandy Cove settlement are not included in this analysis. Sandy Cove has private water services and uses a single meter to measure water consumption. This meter is used by the town to arrive at billed wastewater flows using the assumption that what water is consumed by residents of Sandy Cove is received by the Town s sanitary sewers. Since only one meter is used, virtually all billed wastewater would fall above the 25m 3 threshold, thereby skewing the results of the analysis. 20 DFA Infrastructure International Inc.

167 Wastewater Rate Study and Financial Plan April 15, 2015 Table 10-1: Total Billed Wastewater Flows Above Threshold Total (2013 &2014 Average) Monthly Billed Wastewater Flows (less Sandy Cove) above 25m 3 per month Threshold Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Flow m 3 13,978 12,602 11,558 10,011 14,387 19,463 20,422 25,135 21,540 13,918 14,456 10, ,060 Total (2013 &2014 Average) Monthly Billed Wastewater Flows (less Sandy Cove) Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Flow m 3 128, , ,542 99, , , , , , , , ,689 1,423,957 Percent of Monthly Billed Wastewater Flows Above Threshold Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Flow m 3 11% 11% 11% 10% 13% 14% 16% 18% 16% 13% 12% 10% 13% Option 3: Increasing Block (Residential Users Only Year Round) This conservation-oriented rate structure option is the same as Option 2 but applies only to residential customers as they are deemed to be the drivers of peak demand. This rationale is based on the following: - Residential billed wastewater flows accounts for over 90% of the total billed wastewater flows; and - Non-residential billed wastewater flows being reasonably consistent throughout the year. This option also gives consideration to the principles of Fairness and Industry Promotion where the Town may wish to support economic growth by providing incentives in the rate structure. As detailed in Table 10.2, based on the average 2013 and 2014 monthly billed wastewater patterns, approximately 8% of total billed wastewater flows is expected to fall within the second block under this option. Table 10-2: Residential Billed Wastewater Flows Above Threshold Residential (2013 &2014 Average) Monthly Billed Wastewater Flows (less Sandy Cove) above 25m 3 per month Threshold Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Flow m 3 8,974 7,804 6,072 5,002 7,858 12,030 12,325 17,703 13,236 7,003 8,351 5, ,865 Total (2013 &2014 Average) Monthly Billed Wastewater Flows (less Sandy Cove) Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Flow m 3 128, , ,542 99, , , , , , , , ,689 1,423,957 Percent of Monthly Billed Wastewater Flows Above Threshold Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Flow m 3 7% 7% 6% 5% 7% 9% 10% 12% 10% 6% 7% 5% 8% Option 4: Excessive Use Charge (Residential Users Only During Peak Demand June to September). This conservation-oriented rate structure option is similar to Option 3 but applies only to the peak demand period. It will not adversely impact low water volume users where consumption is for essential needs and therefore cannot be adjusted. The Excessive Use Charge is intended to provide an incentive for residential users to reduce excess consumption during the peak demand period. As detailed in Table 10.3 the average 2013 and 2014 monthly billed wastewater flow pattern, peak demand is expected to occur within the four (4) months of June to September. As noted in Table 10.3 the second block for this period represents approximately 4% of total annual billed wastewater flows under this option. 21 DFA Infrastructure International Inc.

168 Wastewater Rate Study and Financial Plan April 15, 2015 Table 10-3: Seasonal Billed Wastewater Flows Above Threshold Seasonal (2013 &2014 Average) Monthly Billed Wastewater Flows (less Sandy Cove) above 25m 3 per month Threshold Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Flow m 3 8,974 7,804 6,072 5,002 7,858 12,030 12,325 17,703 13,236 7,003 8,351 5,510 55,293 Total (2013 &2014 Average) Monthly Billed Wastewater Flows (less Sandy Cove) Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Flow m 3 128, , ,542 99, , , , , , , , ,689 1,423,957 Percent of Monthly Billed Wastewater Flows Above Threshold Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Flow m 3 7% 7% 6% 5% 7% 9% 10% 12% 10% 6% 7% 5% 4% 10.2 Proposed Wastewater Base Charges The first component of each rate structure option considered is the Wastewater Base Charge. The proposed base charge for each type of customer remains the same for each rate structure option, ensuring that the proportion of total wastewater costs to be recovered from base charges and volumetric charges remained the same among all options. The current split of total cost recovered from base/volumetric charges stands at a ratio of 53/47. This ratio will remain relatively stable over the forecast period with the ratio decreasing slightly to 52/48 by Table 10.4 provides a schedule of proposed base charges by type of customer for the years Appendix H contains the proposed base charges for the entire forecast period To ensure sufficient funds are raised thru the base charge component there is required to be a 6% increase in 2016 and 2017 base charges, with a 4% increase in 2018, and a 2% increase in Thereafter the base charges for each type of customer remains stable over the balance of the forecast period to Table 10-4: Proposed Base Charge By Customer Type Proposed Wastewater Base Charges by Customer Type for the Years Customer Type Annual % Increase 6% 6% 4% 2% 0% 0% 0% Residential (Sewer Only) $ $ $ $ $ $ $ $ Residential (Mixed Use Sewer Only) $ $ $ $ $ $ $ $ Residential (Water & Sewer) $ $ $ $ $ $ $ $ Residential (Mixed Use Water & Sewer) $ $ $ $ $ $ $ $ Residential (Sandy Cove) $ $ $ $ $ $ $ $ Commercial & Industrial (Sewer Only) $1, $1, $1, $1, $1, $1, $1, $1, Commercial & Industrial (Water & Sewer) $ $ $1, $1, $1, $1, $1, $1, Institutional (Sewer Only) $8, $9, $9, $10, $10, $10, $10, $10, Institutional (Water & Sewer) $5, $5, $5, $6, $6, $6, $6, $6, Water Treatment Plant $1, $1, $1, $1, $1, $1, $1, $1, Proposed Consumption Wastewater Rates By Rate Structure Option The second component of each rate structure option is the Consumption Rate. Similar to the Base Charge, each Consumption Wastewater Rate Structure Option is revenue neutral in that total Consumption Rate revenues will not differ among the rate structure options. However, unlike the Base Charge, Consumption Rates will vary by rate structure option, as will the burden of Consumption Rate revenues borne by each customer class. Customer impacts are discussed in greater detail in Section Table 10.5 provides a schedule of projected Consumption 22 DFA Infrastructure International Inc.

169 Wastewater Rate Study and Financial Plan April 15, 2015 Wastewater Rates by Rate Structure Option for the period of Appendix I contains the projected Consumption Wastewater Rates by Rate Structure Option for the full forecast period Option 1 Uniform Rate-Status Quo is the current rate structure used by the town and as such is used as the Base Option by which the other rate structure options will be compared. Under the Base Option, the proposed consumption wastewater rate increases to $1.36m 3 or 4% in 2016, to $1.41m 3 or a 4% increase in 2017, and to $1.44m 3 or a 2% increase in No further consumption rate increases are required over the balance of the forecast period to As the Base Option does not include a higher second block, second block revenue risk (the increased risk of loss of revenue due to a reduction in consumption that would fall within the second block) is not a factor. Option 2 Increasing Block (All Users Year Round) is a two-block structure with the second block rate set a premium of 50% over the first block rate, and at a consumption level above 25m 3. The 25m 3 threshold will allow for the majority of essential water use to fall within the first block, and as such the higher second block will apply to discretionary water use only. When compared to the Base Option, Option 2 allows for a significantly smaller increase in the proposed first block consumption wastewater rate with a rate of $1.30/m 3 or no increase in 2016, a rate of $1.36/m 3, or a 5% increase in 2017, a rate of $1.40/m 3 or a 3% increase in 2018, and a rate of $1.42/m 3 or an increase of 1% in No further rate increases are required over the balance of the forecast period to Option 2 provides an economic incentive to encourage user to conserve water thereby defer the need to increase system capacity. Option 2 however provides for the greatest second block revenue risk as 13% of consumption (billed wastewater volumes) is assumed to fall within the second block. Should consumption in the second block be lower than forecast, this Option provides the greatest risk of a wastewater revenue shortfall. Option 3 Increasing Block (Residential Users Only Year Round) is the same as Option 2, however the second block rate will only apply to residential customers as they are deemed to be the drivers of peak demand. Option 3 also gives consideration to the principles of Fairness and Industry Promotion as consumption for non-residential customers are not subject to the higher second block rate. When compared to the Base Option, Option 3 allows for a lower increase in 2016 with a proposed consumption water rate of $1.33/m 3 or increase of 2%, and a slightly higher increase of 5% increase in 2017 for a rate of $1.39/m 3, a 3% increase in 2018 for a rate of $1.43/m 3, and a 1% increase in 2019 for a rate of $1.44/m 3, with no further increases required over the balance of the forecast period to Option 3 also provides for a second block revenue risk, but not to the same extent as Option 2 as only 8% of consumption is assumed to fall within the second block. Option 4 Excessive Use Charge (Residential Users Only During Peak Demand June to September) is similar to Option 3. However the second block rate will only apply residential customers during the peak demand period. Option 4 is intended to provide an incentive for residential customers to reduce excess consumption during the peak demand period (which is expected to fall within the Months of June to September). When compared to the Base Option, Option 4 allows for slightly lower increase in 2016 of 3% for a rate of $1.34/m 3, with the same increase of 4% increase in 2017 for a rate of $1.40/m 3, a rate increase of 2% in 2018 for a rate of $1.43/m 3, and a rate increase of 1% in 2019 for a rate of $1.44/m 3. No further consumption rate increases are required over the balance of the forecast period to Option 2 provides for the lowest second block revenue risk of the conservation-oriented rate structures as only 4% of consumption is assumed to fall within the second block. 23 DFA Infrastructure International Inc.

170 Wastewater Rate Study and Financial Plan April 15, 2015 Table 10-5: Proposed Consumption Wastewater Rates for the Years Projected Consumption Wastewater Rates for the Years Option Description Annual % Increase 4% 4% 2% 0% 0% 0% 0% Option 1 UNIFORM RATE $1.30 $1.36 $1.41 $1.44 $1.44 $1.44 $1.44 $1.44 INCREASING BLOCK RATE (All Users Year Round) Option 2 Option 3 Option 4 Annual % Increase 0% 5% 3% 1% 0% 0% 0% Block 1 (87% of Billed Wastewater Flows) $1.30 $1.30 $1.36 $1.40 $1.42 $1.42 $1.42 $1.42 Block 2 (13% of Billed Watewater Flows) $1.95 $2.04 $2.11 $2.13 $2.13 $2.13 $2.13 INCREASING BLOCK RATE (Residential Users Only Year Round) Annual % Increase 2% 5% 3% 1% 0% 0% 0% Block 1 (92% of Billed Wastewater Flows) $1.30 $1.33 $1.39 $1.43 $1.44 $1.44 $1.44 $1.44 Block 2 ( 8% of Billed Watewater Flows) $1.99 $2.09 $2.15 $2.15 $2.15 $2.15 $2.15 EXCESSIVE USE CHARGE (Residential Users Only During Peak Demand-June to September) Annual % Increase 3% 4% 2% 1% 0% 0% 0% Block 1 (96% of Billed Wastewater Flows) $1.30 $1.34 $1.40 $1.43 $1.44 $1.44 $1.44 $1.44 Block 2 ( 4% of Billed Watewater Flows) $2.01 $2.10 $2.15 $2.15 $2.15 $2.15 $ Customer Impacts The impacts that the projected wastewater rates and charges presented in Subsection 10.2 are calculated by customer class for each of the four (4) rate structure options. Customer impacts for the Residential, Commercial/Industrial and Institutional classes for the years are shown in tables 10-6 thru 10-8 respectively. Table 10-9 provides the changes in impact, by average customer, that conversation-oriented Options 2 thru 4 have over the Base Option (Option 1) Residential Customer Impacts Residential customer impacts for each rate structure option is presented in Table 10.6 for the years Appendix J contains the projected residential customer impacts for the entire forecast period The residential customer impacts displayed in Table 10.6 represents projected annual residential customer wastewater bills based on an average residential billed wastewater volume of 174 cubic meters per year. It is assumed that any proposed new rate structure would commence in 2016, as such 2015 impacts are the same for all options since they reflect the current uniform rate structure employed by the Town. As can be seen in Table 10.6, projected residential wastewater bills will vary by Rate Structure Option. This is the result of shifts in wastewater cost burden to the non-residential classes of wastewater customer, as well as shifts in wastewater cost burden to high residential wastewater customers (residential wastewater customers where billed wastewater volumes exceed 25m 3 /month) For the average residential wastewater customer, Option 2 provides the lowest cost option, with the Base Option (Current Uniform Rate Structure) providing the highest. Option 2 provides the lowest cost option for the residential class due to the large volume of billed wastewater that falls under the higher second block, of which the majority belongs to non-residential customers. Because of the large shift in wastewater cost burden to the non- 24 DFA Infrastructure International Inc.

171 Wastewater Rate Study and Financial Plan April 15, 2015 residential classes, it can be viewed that under Option 2, non-residential customers are to a certain extent subsiding the residential class of wastewater customer. Annual Base Charge Option 1 (Constant Rate) Table 10-6: Residential Customer Impacts for the Years Residential Customer Impacts for the Years $173 $183 $194 $202 $206 $206 $206 $206 Annual Consumptive Charge $227 $236 $245 $250 $250 $250 $250 $250 Total Annual Residential Bill (Option 1) $400 $419 $440 $452 $457 $457 $457 $457 Annual Bill Increase ($) $19 $19 $20 $13 $4 $0 $0 $0 Annual Bill Increase (%) 5% 5% 5% 3% 1% 0% 0% 0% Option 2 (Increasing Block) Annual Base Charge $173 $183 $194 $202 $206 $206 $206 $206 Annual Consumptive Charge $227 $226 $237 $244 $247 $247 $247 $247 Total Annual Residential Bill (Option 2) $400 $409 $431 $446 $453 $453 $453 $453 Annual Bill Increase ($) $19 $9 $22 $15 $7 $0 $0 $0 Annual Bill Increase (%) 5% 2% 5% 3% 2% 0% 0% 0% Option 3 (Increasing Block -Residential Only) Annual Base Charge $173 $183 $194 $202 $206 $206 $206 $206 Annual Consumptive Charge $227 $231 $242 $249 $250 $250 $250 $250 Total Annual Residential Bill (Option 3) $400 $414 $437 $451 $456 $456 $456 $456 Annual Bill Increase ($) $19 $14 $22 $14 $5 $0 $0 $0 Annual Bill Increase (%) 5% 4% 5% 3% 1% 0% 0% 0% Option 4 (Excessive Use Charge) Annual Base Charge $173 $183 $194 $202 $206 $206 $206 $206 Annual Consumptive Charge $227 $233 $243 $249 $250 $250 $250 $250 Total Annual Residential Bill (Option 4) $400 $416 $437 $451 $456 $456 $456 $456 Annual Bill Increase ($) $19 $16 $21 $14 $5 $0 $0 $0 Annual Bill Increase (%) 5% 4% 5% 3% 1% 0% 0% 0% Summary of Residential Customer Annual Wastewater Charge Option 1 (Constant Rate) $400 $419 $440 $452 $457 $457 $457 $457 Option 2 (Increasing Block) $400 $409 $431 $446 $453 $453 $453 $453 Option 3 (Increasing Block -Residential Only) $400 $414 $437 $451 $456 $456 $456 $456 Option 4 (Excessive Use Charge) $400 $416 $437 $451 $456 $456 $456 $ Commercial Customer Impacts Commercial customer impacts for the years for each rate structure option is presented in Table Appendix K contains the projected commercial customer impacts for the entire forecast period The commercial customer impacts displayed in Table 10.7 represents projected annual commercial customer wastewater bills based on a blended average commercial/industrial billed wastewater volume of 800 cubic meters per year. As previously mentioned, it is assumed that any proposed new rate structure would commence in 2016, therefore 2015 impacts are the same for all options as they reflect the current uniform rate structure employed by the Town. As can be seen in Table 10.7, projected commercial wastewater bills will vary by Rate Structure Option. This is the result of shifts in wastewater cost burden to the non-residential classes (including the commercial class), and to a lesser extent, shifts in wastewater cost burden to high residential wastewater customers (residential wastewater customers where billed wastewater volumes exceed 25m 3 /month) For the average commercial wastewater customer, Option 2 provides the highest cost option as the higher average commercial customer volumes will shift a large portion of the wastewater cost burden away from the residential class and onto the commercial class. Option 3 would provide the lowest cost options for the commercial class as there is a shift in wastewater cost burden to high residential wastewater customers that are subject to the higher second block wastewater rate. Option 4 also provides a favourable cost option for the average commercial wastewater customer, but not to the same extent as Option 3. Under Option 4 the higher block two wastewater rate is only applied to 25 DFA Infrastructure International Inc.

172 Wastewater Rate Study and Financial Plan April 15, 2015 excessive residential water consumption (billed wastewater volumes) occurring during peak months, and not excessive residential consumption occurring throughout the year as found under Option 3. Annual Base Charge Option 1 (Constant Rate) Table 10-7: Commercial Customer Impacts for the Years Commercial Customer Impacts for the Years $935 $991 $1,050 $1,092 $1,114 $1,114 $1,114 $1,114 Annual Consumptive Charge $1,043 $1,085 $1,128 $1,151 $1,151 $1,151 $1,151 $1,151 Total Annual Commercial/Industrial Bill (Option 1) $1,978 $2,076 $2,179 $2,243 $2,265 $2,265 $2,265 $2,265 Annual Bill Increase ($) $93 $98 $103 $65 $22 $0 $0 $0 Annual Bill Increase (%) 5% 5% 5% 3% 1% 0% 0% 0% Option 2 (Increasing Block) Annual Base Charge $935 $991 $1,050 $1,092 $1,114 $1,114 $1,114 $1,114 Annual Consumptive Charge $1,043 $1,362 $1,430 $1,474 $1,490 $1,491 $1,491 $1,492 Total Annual Commercial/Industrial Bill (Option 2) $1,978 $2,353 $2,481 $2,566 $2,604 $2,605 $2,606 $2,607 Annual Bill Increase ($) $93 $375 $128 $86 $38 $1 $1 $1 Annual Bill Increase (%) 5% 19% 5% 3% 1% 0% 0% 0% Option 3 (Increasing Block -Residential Only) Annual Base Charge $935 $991 $1,050 $1,092 $1,114 $1,114 $1,114 $1,114 Annual Consumptive Charge $1,043 $1,062 $1,115 $1,144 $1,148 $1,148 $1,148 $1,149 Total Annual Commercial/Industrial Bill (Option 3) $1,978 $2,053 $2,165 $2,237 $2,263 $2,263 $2,263 $2,263 Annual Bill Increase ($) $93 $75 $112 $71 $26 $0 $0 $0 Annual Bill Increase (%) 5% 4% 5% 3% 1% 0% 0% 0% Option 4 (Excessive Use Charge) Annual Base Charge $935 $991 $1,050 $1,092 $1,114 $1,114 $1,114 $1,114 Annual Consumptive Charge $1,043 $1,071 $1,118 $1,144 $1,148 $1,148 $1,148 $1,149 Total Annual Commercial/Industrial Bill (Option 4) $1,978 $2,062 $2,168 $2,237 $2,263 $2,263 $2,263 $2,263 Annual Bill Increase ($) $93 $84 $106 $68 $26 $0 $0 $0 Annual Bill Increase (%) 5% 4% 5% 3% 1% 0% 0% 0% Summary of Commercial/Industrial Customer Annual Wastewater Charge Option 1 (Constant Rate) $1,978 $2,076 $2,179 $2,243 $2,265 $2,265 $2,265 $2,265 Option 2 (Increasing Block) $1,978 $2,353 $2,481 $2,566 $2,604 $2,605 $2,606 $2,607 Option 3 (Increasing Block -Residential Only) $1,978 $2,053 $2,165 $2,237 $2,263 $2,263 $2,263 $2,263 Option 4 (Excessive Use Charge) $1,978 $2,062 $2,168 $2,237 $2,263 $2,263 $2,263 $2, Institutional Customer Impacts Institutional customer impacts for each rate structure option is presented in Table 10.8 for the years Appendix L contains the projected institutional customer impacts for the entire forecast period The institutional customer impacts displayed in Table 10.8 represents projected annual institutional customer wastewater bills based on an average institutional billed wastewater volumes of 4,250 cubic meters per year. Again, it is assumed that any proposed new rate structure would commence in 2016, as such 2015 impacts are the same for all options as they reflect the current uniform rate structure employed by the Town. As can be seen in Table 10.8, projected institutional wastewater bills will vary by Rate Structure Option. Identical to the commercial customer analysis discussed above, institutional wastewater bills will vary as a result of shifts in wastewater cost burden to the institutional class, and to a lesser extent shifts in wastewater cost burden to high residential wastewater customers (residential wastewater customers where billed wastewater volumes exceed 25m 3 /month). For the average institutional wastewater customer Option 2 provides the highest cost option as the higher average institutional customer volumes will shift a large portion of the wastewater cost burden away from the residential class and onto the institutional class. Option 3 would provide the lowest cost options for the institutional class as there is a shift in wastewater cost burden to high residential wastewater customers that are subject to the higher second block wastewater rate. Option 4 also provides a favourable cost option for the average institutional wastewater customer, but not to the same extent as Option 3. Under Option 4 the higher block two wastewater rate is only applied to excessive residential water consumption (billed wastewater volumes) occurring 26 DFA Infrastructure International Inc.

173 Wastewater Rate Study and Financial Plan April 15, 2015 during peak months, and not excessive residential consumption occurring throughout the year as found under Option 3. Annual Base Charge Option 1 (Constant Rate) Table 10-8: Institutional Customer Impacts for the Years Institutional Customer Impacts for the Years $5,339 $5,660 $5,999 $6,239 $6,364 $6,364 $6,364 $6,364 Annual Consumptive Charge $5,543 $5,764 $5,995 $6,115 $6,115 $6,115 $6,115 $6,115 Total Annual Institutional Bill (Option 1) $10,882 $11,424 $11,994 $12,354 $12,479 $12,479 $12,479 $12,479 Annual Bill Increase ($) $515 $542 $570 $360 $125 $0 $0 $0 Annual Bill Increase (%) 5% 5% 5% 3% 1% 0% 0% 0% Option 2 (Increasing Block) Annual Base Charge $5,339 $5,660 $5,999 $6,239 $6,364 $6,364 $6,364 $6,364 Annual Consumptive Charge $5,543 $8,075 $8,479 $8,738 $8,834 $8,837 $8,842 $8,847 Total Annual Institutional Bill (Option 2) $10,882 $13,734 $14,478 $14,977 $15,198 $15,201 $15,206 $15,211 Annual Bill Increase ($) $515 $2,852 $744 $499 $221 $3 $5 $5 Annual Bill Increase (%) 5% 26% 5% 3% 1% 0% 0% 0% Option 3 (Increasing Block -Residential Only) Annual Base Charge $5,339 $5,660 $5,999 $6,239 $6,364 $6,364 $6,364 $6,364 Annual Consumptive Charge $5,543 $5,642 $5,922 $6,078 $6,101 $6,101 $6,101 $6,101 Total Annual Institutional Bill (Option 3) $10,882 $11,301 $11,921 $12,318 $12,465 $12,465 $12,465 $12,465 Annual Bill Increase ($) $515 $419 $620 $397 $148 $0 $0 $0 Annual Bill Increase (%) 5% 4% 5% 3% 1% 0% 0% 0% Option 4 (Excessive Use Charge) Annual Base Charge $5,339 $5,660 $5,999 $6,239 $6,364 $6,364 $6,364 $6,364 Annual Consumptive Charge $5,543 $5,690 $5,938 $6,078 $6,101 $6,101 $6,101 $6,101 Total Annual Institutional Bill (Option 4) $10,882 $11,350 $11,937 $12,318 $12,465 $12,465 $12,465 $12,465 Annual Bill Increase ($) $515 $468 $587 $380 $148 $0 $0 $0 Annual Bill Increase (%) 5% 4% 5% 3% 1% 0% 0% 0% Summary of Institutional Customer Annual Wastewater Charge Option 1 (Constant Rate) $10,882 $11,424 $11,994 $12,354 $12,479 $12,479 $12,479 $12,479 Option 2 (Increasing Block) $10,882 $13,734 $14,478 $14,977 $15,198 $15,201 $15,206 $15,211 Option 3 (Increasing Block -Residential Only) $10,882 $11,301 $11,921 $12,318 $12,465 $12,465 $12,465 $12,465 Option 4 (Excessive Use Charge) $10,882 $11,350 $11,937 $12,318 $12,465 $12,465 $12,465 $12, Average Customer Bill Impact To show the impact that the three (3) conservation-oriented rate structure options have on an average customer wastewater bill, Table 10.9 compares Rate Structure Option 2 thru 4 to the Base Option for the years by providing the incremental change on projected average customer wastewater bills. Appendix M contains the projected average customer bill incremental impact for the entire forecast period Comparing Option 2 to the Base Option - the average residential customer wastewater bill will fall modestly, whereas the average wastewater bill for both the commercial and institutional customer will increase significantly. This is due to the higher average wastewater billed volumes of commercial and institutional customers that, under Option 2, would be subject to the higher second block wastewater rate. As noted previously, under Option 2, non-residential customers are seen as subsiding the residential class of wastewater customer. Comparing Option 3 to the Base Option - all the average customer (residential, commercial and institutional) wastewater bills will fall. This is the result of the shift of wastewater cost burden to high residential wastewater customers (residential wastewater customers where monthly billed wastewater volumes exceed 25m 3 /month). Non-residential customer are no longer seen as subsiding the residential class of wastewater customer. 27 DFA Infrastructure International Inc.

174 Wastewater Rate Study and Financial Plan April 15, 2015 Comparing Option 4 to the Base Option - similar to Option 3, all average customer (residential, commercial and institutional) wastewater bills will fall, but not to the same extent as under Option 3. The shift of wastewater cost burden to the high residential wastewater customer is limited to the excessive residential water consumption (billed wastewater volumes) occurring during peak months, and not excessive residential consumption occurring throughout the year as found under Option 3. Table 10-9: Customer Impact Over Base Option for the Years Customer Impact over Base Option - Option 2 (Increasing Block) Customer Class Residential $0 ($10) ($8) ($6) ($3) ($3) ($3) ($3) Commercial/Industrial $0 $277 $302 $323 $339 $340 $340 $341 Institutional $0 $2,310 $2,484 $2,623 $2,719 $2,722 $2,728 $2,732 Customer Impact over Base Option - Option 3 (Increasing Block -Residential Only) Customer Class Residential $0 ($5) ($3) ($1) ($1) ($1) ($1) ($1) Commercial/Industrial $0 ($23) ($14) ($7) ($3) ($3) ($3) ($3) Institutional $0 ($123) ($73) ($36) ($13) ($13) ($13) ($13) Customer Impact over Base Option - Option 4 (Excessive Use Charge) Customer Class Residential $0 ($3) ($2) ($1) ($1) ($1) ($1) ($1) Commercial/Industrial $0 ($14) ($11) ($7) ($3) ($3) ($3) ($3) Institutional $0 ($74) ($57) ($36) ($13) ($13) ($13) ($13) 10.5 Preferred Rate Structure Option As noted previously, four (4) rate structure option were identified for further review. One (1) is the current rate structure (Base Option) employed by the town, and three (3) are conservation-oriented rate structures that were recommended in the Qualitative Analysis contained in Appendix B. Table provides a summary of the results of the Qualitative Analysis of the Rate Structure Options. Table 10-10: Summary of Qualitative Analysis of Rate Structure Options Summary of Qualitative Analysis of Rate Structure Options Option 1 Option 2 Option 3 Option 4 Guiding Principle Base Option Increasing Block (All Users Year Round) Increasing Block (Residential Users Only Year Round) Excessive Use Charge (Residential Users Only During Peak Demand) Full Cost Recovery Reduce Wasteful Uses of Water Fairness and Reasonableness (avoid discriminaiton) Ease of Adminstration Stability Industry Promotion Future Debt to be Avoided Full Cost Recovery - All rate structure options are designed to sustain adequate financing to recover the full costs of the collection and treatment of wastewater from Town customers. 28 DFA Infrastructure International Inc.

175 Wastewater Rate Study and Financial Plan April 15, 2015 Reduce Wasteful Uses of Water All rate structure options encourage customers to conserve water (reduce wastewater flows) by way of the consumption rate. Option 2 thru 4 however are better designed by way of the higher second block rate component to encourage customers with discretionary water uses and with peak demands that are significantly higher than moral demands to reduce consumption. Fairness and Reasonableness (avoid discrimination) All rate structure options promote the principle of user-pay, which is a fair and reasonable approach to wastewater cost recovery. However, Option 2, with a higher second block that applies to all users, can be seen as discriminating against large volume non-residential water users (billed wastewater customers) that do not have the discretion to reduce water consumption. Ease of Administration The Base Option is the easiest rate structure option to administer as there would be no change in the status quo billing protocols. Options 2 and 3 would require changes to the wastewater billing protocols as a second block would need to be added. Based on discussions with InnPower these changes would not be difficult as the current billing software allows for a two block structure. An outward facing communication strategy would be required to education wastewater customers as to the purpose of the second block. Option 4 however would be more difficult to administer as a decision as to when the second block would become active, and what wastewater bills the higher second block rate would apply would need to be made and would be subject to disagreement. While InnPower confirmed a time-limited block two rate structure could be implemented, there would be challenges as to consistency in billing cycles and volumes subject to the two block structure. Stability All rate structures promote revenue stability to the extent of the base charge component revenues. However all conservation-oriented rate structure options have to varying degrees a second block revenue risk (the increased risk of loss of revenue due to a reduction in consumption that would fall within the second block) The second block revenue risk can be minimized however by conservatively projecting water consumption (billed wastewater) volumes when setting wastewater rates. Industry Promotion Option 1, as the Base Option, can be seen as being neutral to promoting industry within Innisfil. Option 2 however can be seen as adversely impacting industry by subjecting nondiscretionary non-residential billed wastewater customers to the higher second block, thereby significantly increasing the average non-residential wastewater bill as shown in Table Both Options 3 and 4 can be seem as promoting industry by having a lower than otherwise first block consumption rate. Future Debt to be Avoided All rate structures fund the Town s wastewater system through rates and user charges. No debt is considered in financing future replacement projects. As can be seen in Table 10-10, Option 3 meets all of the rate design guiding principles and as such would be viewed as the preferred rate structure option. Also, under Option 3, when considering impacts on the average wastewater bill, all classes of wastewater consumer will see a reduction in their average wastewater bill as detailed in Table Only high residential wastewater customers (residential wastewater customers where monthly billed wastewater volumes exceed 25m 3 /month) will see increases. Option 3 increasing the economic incentive to conserve water and to reduce peak demands, which in turn will have a direct effect on the need to build system capacity, thereby meeting the objective of the Town s Water Conservation and Efficiency Strategy. 29 DFA Infrastructure International Inc.

176 Wastewater Rate Study and Financial Plan April 15, Projected Wastewater Rates Based on the qualitative and quantitative analysis undertaken in this study Option 3 (Increasing Block (Residential Users Only Year Round) is recommended as the preferred wastewater rate structure option to be used in calculating projected rates and charges. The projected wastewater rates and charges for the study period required to recover the full cost of managing each wastewater system are presented in Appendix N. The annual base charges for the period from 2015 to 2022 are shown in Table 10-11, with the projected consumption rates are shown in Table The projected annual rate increases are also shown. Table 10-11: Projected Base Charges ( ) Projected Wastewater Base Charges by Customer Type for the Years Customer Type Annual % Increase 6% 6% 4% 2% 0% 0% 0% Residential (Sewer Only) $ $ $ $ $ $ $ $ Residential (Mixed Use Sewer Only) $ $ $ $ $ $ $ $ Residential (Water & Sewer) $ $ $ $ $ $ $ $ Residential (Mixed Use Water & Sewer) $ $ $ $ $ $ $ $ Residential (Sandy Cove) $ $ $ $ $ $ $ $ Commercial & Industrial (Sewer Only) $1, $1, $1, $1, $1, $1, $1, $1, Commercial & Industrial (Water & Sewer) $ $ $1, $1, $1, $1, $1, $1, Institutional (Sewer Only) $8, $9, $9, $10, $10, $10, $10, $10, Institutional (Water & Sewer) $5, $5, $5, $6, $6, $6, $6, $6, Water Treatment Plant $1, $1, $1, $1, $1, $1, $1, $1, Table 10-12: Projected Consumption Water Rates ( ) Option Description Option 3 Projected Consumption Wastewater Rates for the Years INCREASING BLOCK RATE (Residential Users Only Year Round) Annual % Increase 2% 5% 3% 1% 0% 0% 0% Block 1 Consumption Rate $1.30 $1.33 $1.39 $1.43 $1.44 $1.44 $1.44 $1.44 Block 2 Consumption Rate $1.99 $2.09 $2.15 $2.15 $2.15 $2.15 $ Wastewater System Financial Plan 11.1 Financial Statements This financial plan involves the review, analysis and assessment of financial information contained in the rate study including costs, revenues, debt, cash transactions and Tangible Capital Assets (TCA) to prepare the following three (3) financial statements covering the period 2016 to 2021 as required under O.Reg. 453/07: Statement of Financial Position; Statement of Operations; and Statement of Cash Flow. 30 DFA Infrastructure International Inc.

177 Wastewater Rate Study and Financial Plan April 15, Statement of Financial Position The Statement of Financial Position is presented in Table This statement summarizes the Town s wastewater related financial and non-financial assets (Tangible Capital Assets TCA) and liabilities, and provides the net financial asset/ (net debt) position and accumulated surplus related to managing the wastewater system. The financial assets are primarily cash balances in the wastewater reserves and reserve funds. Liabilities consist of development charge reserve fund balances (i.e. deferred revenues). The non-financial assets (TCA) include the Town s wastewater infrastructure and facilities. The historical costs are amortized over the asset life to arrive at the net book value each year from 2016 to New assets are added in the years acquired, developed or built. Contributed assets are primarily new infrastructure and facilities that would be transferred to the Town s ownership and control by developers as they are completed. However this is assumed to be zero. It is also assumed that other non-financial assets such as inventory and prepaid expenses are zero. Contained within the Statement of Financial Position are important indicators, the first being net financial assets (or net debt) which is defined as the difference between financial assets and liabilities. This indicator provides an indication of a wastewater system's "future revenue requirement". Table 11.1 indicates that in 2016, the Town's wastewater system will be in a net financial asset position of $11.2 million. This will grow to a net financial asset position of $16.9 million by The net financial asset position indicates that financial resources are available to fund future operations. The increased net financial asset position is due to a combination of the increase in the cash position and a decrease in liabilities mainly through a decrease in deferred revenues. The next important indicator contained in the Statement of Financial Position is the net book value of TCA. Table 11-1 shows that net TCA are expected to grow by over $100 million over the forecast period, or from $71.9 million in 2016 to $172.1 million This indicates that the Town has plans to invest significant dollars in tangible capital assets in excess of the consumption of existing assets. The largest investment will come in 2020 with the $80 million expansion of the Lakeshore Wastewater Treatment Plant. Further, a consumption ratio consisting of the accumulated amortization of the Town's TCA as a percent of historical cost ratio highlights the aged condition of the assets and their potential replacement needs. The Town's Wastewater Asset Consumption Ratio actually decreases from 23% in 2016 to 15% in The reduction in the ratio is due to the weighting of new assets acquired or constructed over the forecast period. It should be noted that it is assumed in these statements that the Town will arrange a large portion of development related funding through front-ended financing agreements to cash-flow the growth related funding needs over the forecast period. Failure to secure front-end financing would require the issuance of debt or cause a delay in some growth related projects. Another important indicator in the Statement of Financial Position is the accumulated surplus. This indicator provides an indication of the resources available to the Town for managing its wastewater system. The accumulated surplus is projected to increase from approximately $83 million in 2016 to approximately $189 million by The accumulated surplus is predominately made up of the net TCA balance representing past investments in the wastewater systems infrastructure. 31 DFA Infrastructure International Inc.

178 Wastewater Rate Study and Financial Plan April 15, 2015 Table 11-1: Statement of Financial Position Financial Assets Cash,Receivables and Investment $12,505,364 $8,751,681 $11,932,592 $15,511,694 $14,651,061 $16,926,262 Total Financial Assets $12,505,364 $8,751,681 $11,932,592 $15,511,694 $14,651,061 $16,926,262 Financial Liabilities Accounts Payable & Deferred Revenue $1,306,780 $0 $1,358,188 $2,968,017 $0 $0 Long-term Liabilities $0 $0 $0 $0 $0 $0 Total Financial Liabilities $1,306,780 $0 $1,358,188 $2,968,017 $0 $0 Net Financial Assets (Net Debt) $11,198,584 $8,751,681 $10,574,404 $12,543,677 $14,651,061 $16,926,262 Non-Financial Assests Tangible Capital Assets $93,004,113 $105,745,810 $106,011,111 $106,011,112 $196,778,646 $202,726,022 Accumulated Amortization $21,095,803 $22,516,584 $24,060,841 $25,608,414 $27,806,019 $30,597,204 Total Non-Financial Assets $71,908,309 $83,229,225 $81,950,270 $80,402,697 $168,972,627 $172,128,819 Accumulated Surplus $83,106,893 $91,980,906 $92,524,674 $92,946,374 $183,623,688 $189,055,080 Financial Indicators Increase (Decrease) in Net Financial Assets $870,892 ($2,446,903) $1,822,723 $1,969,273 $2,107,384 $2,275,200 Increase (Decrease) in Net Tangible Capital Assets ($807,637) $11,320,916 ($1,278,956) ($1,547,572) $88,569,930 $3,156,191 Increase (Decrease) in Accumulated Surplus $63,254 $8,874,013 $543,767 $421,701 $90,677,314 $5,431,392 Water Asset Consumption Ratio -23% -21% -23% -24% -14% -15% Statement of Operations The Statement of Operations is presented in Table It summarizes the annual revenues and expenses associated with managing the Town s wastewater system. It provides a report on the transactions and events that have an influence on the accumulated surplus. The main revenue items included are: Revenues from Wastewater Rate Charges ; Earned Revenues (earned development charges and capital contributions); and Other Revenues (administrative fees, septic receiving fees, salary/benefits internal charges, etc) The main expense items are: The annual cost of operating and maintaining the wastewater system,; and Amortization expenses on existing and added TCA. The operating surplus/ (deficit) is an important indicator contained in the Statement of Operations. An operating surplus/ (deficit) measures whether operating revenues generated in a year were sufficient to cover operating expenses incurred in that year. It is important to note that an annual surplus is necessary to ensure funds will be available to address non-expense items such as TCA acquisitions over and above amortization expenses, reserve/reserve fund contributions for asset replacement and rate stabilization, and repayment of outstanding debt principal. A ratio of operating surplus to total revenue has been calculated in Table 11-2 to reflect the percent of 32 DFA Infrastructure International Inc.

179 Wastewater Rate Study and Financial Plan April 15, 2015 total revenue that can be allocated to funding these non-expense items. It should be noted however that certain years contain a large portion of the annual revenues that are derived from earned revenue sources which are not a cash item, and therefore are not available to address non-expense items. Cash generated from operations is discussed in the Statement of Cash Flows section. Table 11-2: Statement of Operations Water Revenue Rate Revenue $4,234,890 $4,560,500 $4,821,554 $5,004,410 $5,197,303 $5,400,015 Earned Revenue $437,070 $8,888,327 $451,014 $189,426 $90,915,534 $6,144,454 Other Revenue $426,749 $395,101 $425,843 $458,612 $493,304 $530,302 Total Revenues $5,098,708 $13,843,929 $5,698,410 $5,652,447 $96,606,140 $12,074,771 Water Expenses Gross $3,253,546 $3,342,539 $3,424,673 $3,493,749 $3,583,222 $3,655,115 Non-TCA Capital $178,500 $182,070 $185,711 $189,426 $193,214 $197,078 Operating Expenses $3,432,046 $3,524,609 $3,610,385 $3,683,174 $3,776,436 $3,852,194 Interest on Debt $0 $0 $0 $0 $0 $0 Amortization $1,344,606 $1,445,307 $1,544,257 $1,547,573 $2,152,389 $2,791,185 Total Expenses $4,776,652 $4,969,916 $5,154,642 $5,230,748 $5,928,826 $6,643,379 Annual Surplus/(Deficit) $322,056 $8,874,012 $543,769 $421,699 $90,677,314 $5,431,392 Accumulated Surplus/(Deficit), Beginning of Year $82,784,837 $83,106,893 $91,980,906 $92,524,674 $92,946,374 $183,623,688 Accumulated Surplus/ (Deficit), End of Year $83,106,893 $91,980,906 $92,524,674 $92,946,374 $183,623,688 $189,055,080 Financial Indicators Increase (Decrease) in Total Revenues ($24,552,998) $8,745,220 ($8,145,519) ($45,963) $90,953,692 ($84,531,369) Increase (Decrease) in Total Expenses $345,508 $193,265 $184,725 $76,107 $698,077 $714,554 Increase (Decrease) in Annual Surplus ($24,898,506) $8,551,956 ($8,330,244) ($122,069) $90,255,615 ($85,245,922) Operating Surplus Ratio 6.3% 64.1% 9.5% 7.5% 93.9% 45.0% Statement of Cash Flow The Statement of Cash Flow is presented in Table This statement summarizes the main cash inflows and outflows related to the wastewater system in four (4) main areas - operating, capital, investing and financing, and shows the annual changes in cash. The operating cash transactions begin with the surplus or deficit identified in the Statement of Operations. This figure is adjusted to add or subtract non-cash items that were included as revenues or expenses (e.g. amortization expenses). It is assumed that there were no investing activities over the period. The capital section indicates the amounts spent to acquire capital assets (TCA) or received from the sale of assets. In the Town s case, it is assumed that there are no assets to be sold to generate cash. The financing section identifies the funds received from frontend financing arrangements, long-term debt, development charges receipts and capital contributions from external sources as cash inflows, and the portion of debt repaid as cash outflows. There were no proceeds from long-term debt over the forecast period. 33 DFA Infrastructure International Inc.

180 Wastewater Rate Study and Financial Plan April 15, 2015 Table 11-3 indicates that cash has been generated from operations, which is used in funding the acquisition of TCA, towards building internal reserves, and to repay debt over the forecast period. The Town's cash position is projected to increase over the forecast period from $12.5 million in 2016 to $16.9 million in Table 11-3: Statement of Cash Flow Cash Provided by: Operating Activities Annual Surplus/(Deficit) $322,056 $8,874,012 $543,769 $421,699 $90,677,314 $5,431,392 Non-Cash Items Amortization $1,344,606 $1,445,307 $1,544,257 $1,547,573 $2,152,389 $2,791,185 Earned Revenue ($437,070) ($8,888,327) ($451,014) ($189,426) ($90,915,534) ($6,144,454) Net Change in Cash Provided by Operating Activities $1,229,593 $1,430,992 $1,637,012 $1,779,847 $1,914,169 $2,078,122 Capital Activities Purchase of TCA $536,969 $12,766,222 $265,302 $0 $90,722,320 $5,947,376 Net Change in Cash Used in Capital Activities $536,969 $12,766,222 $265,302 $0 $90,722,320 $5,947,376 Financing Activities Front-End Financing $0 $5,817,056 $0 $0 $86,083,983 $4,242,716 DC Collections $1,561,780 $1,578,780 $1,623,490 $1,609,829 $1,670,320 $1,704,660 External Financing $182,070 $185,711 $185,712 $189,426 $193,214 $197,078 Proceeds From Long-Term Debt $0 $0 $0 $0 $0 $0 Repayment of Long-Term Debt $0 $0 $0 $0 $0 $0 Net Change in Cash Used in Financing Activities $1,743,850 $7,581,547 $1,809,202 $1,799,255 $87,947,517 $6,144,454 Net Change in Cash and Cash Equivalents $2,436,474 ($3,753,683) $3,180,912 $3,579,102 ($860,633) $2,275,200 Cash and Cash Equivalents, Beginning of the Year $ 10,068,890 $12,505,364 $8,751,681 $11,932,592 $15,511,694 $14,651,061 Cash and Cash Equivalents, End of the Year $12,505,364 $8,751,681 $11,932,592 $15,511,694 $14,651,061 $16,926, Conclusions & Recommendations The following are the main conclusions regarding the wastewater system: The replacement value of the wastewater system is estimated to be $103,608,995 in 2015 dollars (i.e. historical costs indexed to 2015) and the 2015 Net Book Value (NBV) is $49,154,317 (i.e. historical cost less accumulated depreciation); The wastewater system assets as a whole 27% depreciated or have approximately 73% remaining life based on the TCA data; The asset replacement needs are approximately $7.6 million over the next 17 years. Approximately $96 million is required beyond 2031, primarily for replacement of linear assets and the Water Pollution Control Plants; Approximately $152.3 million in capital expenditures is required between 2015 and Over $139 million is being provided from the Development Charges Reserve Fund towards funding growth related capital works over the forecast period. The Town is expecting that a large portion of this development related funding will be arranged through front-ended financing agreements that will cash 34 DFA Infrastructure International Inc.

181 Wastewater Rate Study and Financial Plan April 15, 2015 flow the growth related funding needs. Approximately $4.4 million in financing will be required from the Reserve Fund between 2015 and 2019; The annual capital reserve contributions (to be raised through the wastewater rates each year) over the next five (5) years are projected to range between $1.6 million and $0.4 million from 2015 to 2019; The gross annual O&M costs (not including non-recurring costs and reserve transfers) are expected to increase from approximately $4.4 million in 2015 to $5.0 million by 2019 and up to $9.2 million by 2031; A contribution to the Rate Stabilization Reserve of $31,528 is required to offset a projected deficit in Thereafter annual contributions of $15,000 are made to 2027 the minimum balance of $165,000, or 2.0% annual operating costs is achieved. The full cost of managing the wastewater system over the next 17 years is projected to be an annual average cost of $6.6 million. This is equivalent to a unit cost of $3.05 per cubic metre per year based on an average billed volume of 2,172,089 m 3 per year over the period; Annual increases to the base charge over the next 4 years are projected to be 6% in 2016, 6% for 2017, 4% in 2018, and 2% in 2019; and The ratio of wastewater revenue from the base charge to consumption rates currently stands 53/47, and projected to be 52/48 by The following are the main recommendations resulting from the wastewater rate study: That commencing in 2016, the Town adopt a conservation-oriented wastewater rate structure that includes a two block rate structure where second block rate is set at a premium of 50% over the first block and where the second block is imposed on all residential billed wastewater volumes that exceeds 25m 3 per month; That projected revenue requirements (i.e. full costs projections), capital financing, rates and other financial information presented in this study form the basis for financing the wastewater systems over the next 3 years ( ); That the rates and charges shown for be adopted for 2016 budgeting purposes; That third party funding particularly Federal and Provincial Government funding opportunities for capital projects and operational programs be pursued to supplement available reserve funds and enhance operations; That the capital financing projections presented in this study be updated if the Town decides in the future to consider debt financing; That for 2016 consideration be given to establishing an Asset Lifecycle Reserve Fund and a Rate Stabilization Reserve to fund asset replacement beyond 2031 and to provide a source of funding to offset any year-end operating deficits respectively; That a $6.6 million internal borrowing be provided in 2016 from the Wastewater Capital Reserve to the Water Capital Reserve to ensure that the Water Capital Reserve maintain a positive balance over the 35 DFA Infrastructure International Inc.

182 Wastewater Rate Study and Financial Plan April 15, 2015 forecast period, and that the internal borrowing shall be fully repaid by the earlier of 2031 or when sufficient funds in the Water Capital Reserve become available; That front-ended financing agreements be arranged to cash flow growth related funding needs, and that should these arrangements not be secured that consideration be given to delaying growth related projects until such time that sufficient development charge revenues have been collected; That a copy of the Wastewater Financial Plan be posted on the Town s website; and The Town staff be directed to undertake a further Wastewater Rate review in 2019 for Council approval prior to commencing the 2020 wastewater rate setting exercise. 13 References American Water Works Association (AWWA) Manual: Principles of Water Rates, Fees and Charges Asset Management Plan Wastewater Budget Capital Budget Forecast and 2014 Wastewater Billing Records Development Charge Background Study PSAB 3150 TCA 9. By-Law : 2014 Wastewater Rates 10. Sustainable Water and Sewage Systems Act, Water Opportunities and Conservation Act, DFA Infrastructure International Inc.

183 APPENDICES

184 APPENDIX A By-law

185 THE CORPORATION OF THE TOWN OF INNISFIL BY-LAW NO A By-law of The Corporation of the to impose Wastewater Rates and to prescribe the amount of such rates and to repeal By-law No WHEREAS the Municipal Act 2001, S.O. 2001, c. 25, Section 8 (1) provides that the powers of a municipality shall be interpreted broadly so as to confer broad authority on municipalities to enable municipalities to govern their affairs as they consider appropriate and to enhance their ability to respond to municipal issues; AND WHEREAS the Municipal Act 2001, S.O. 2001, c. 25, Section 9, provides that a municipality has the capacity, rights, powers and privileges of a natural person for the purpose of exercising its authority under the Act; AND WHEREAS the Municipal Act 2001, S.O. 2001, c. 25, Section 11, provides that a lower-tier municipality may pass by-laws respecting matters within the spheres of jurisdiction set out therein, inter alia: public utilities; AND WHEREAS subsection 326 (1) of the Municipal Act, 2001 as amended authorizes the council of a local municipality, in authorizing the installation of special services, to pass a by-law to: a) identify a prescribed special service; b) determine which of the costs, including capital costs, debenture charges, charges for depreciation or a reserve fund of the municipality are related to that special service; c) designate the area of the municipality in which the residents and property owners receive or will receive an additional benefit from the special service that is not received or will not be received on other areas of the municipality; d) determine the portion and set out the method of determining the portion of the costs determined which represent the additional costs to the municipality of providing the additional benefit in the area designated in clause (c); e) determine whether all or a specified portion of the additional costs determined in clause (d) shall be raised under subsection 326 (4) of the Act AND WHEREAS subsection 326 (4) of the Municipal Act, 2001 as amended authorizes the council of a local municipality, in authorizing the installation of special services, to levy a special local municipality levy under section 312 on the rateable property in the area designated in clause 1 (c) of Section 326 to raise the costs as determined in clause 1 (e) of Section 326 thereby imposing a wastewater service rate upon owners or occupants of land who derive or will or may derive benefit there from sufficient to pay all or such portion of the capital costs of the works as the by-law may specify; AND WHEREAS the Council of the deems it expedient to pass a by-law imposing Wastewater Rates and to prescribe the amount of such rates; AND WHEREAS it is now deemed necessary to repeal By-Law No and replace it with this by-law. /

186 Page 2 of 4 BY-LAW NO NOW THEREFORE the Council of The Corporation of the enacts the following: 1. THAT for the purpose of this by-law, the following definitions shall apply: 1.1 Town means The Corporation of the ; 1.2 Capital Cost means the cost of constructing wastewater works, inclusive of all items of cost usually and properly chargeable to capital account, and where applicable, the interest amounts payable on the debentures to be issued for the works and the imputed interest costs determined under subsection 326 (1) of the Act; 1.3 Wastewater Rate means a charge for capital cost of wastewater works and the operation, repair and maintenance of wastewater works and includes a charge for depreciation, deferred maintenance or a reserve fund for any such purpose; 1.4 Wastewater Works means any public works for the collection, transmission, treatment or disposal of wastewater, or any part of any works. 1.5 Billing Agent means Innpower Corporation and the contracted services rendered on behalf of the in regard to the billing and collection of water and wastewater services. 2. THAT every owner of land connected to the wastewater works through which wastewater is treated or otherwise disposed of by the Town shall pay a wastewater rate to be calculated as determined in Schedule "A attached and forming part of this by-law and billed by the Billing Agent. 3. THAT the wastewater rate shall be included with the water rate billing and collected at the time and in the same manner as water rate charges, where applicable. 4. THAT annual base rates and variable consumption rate billing will commence on date of the water meter installation. Base rates shall not apply to properties previously supplied with water/wastewater services that have been or are subject to demolition as confirmed by a Demolition Permit issued by the Town. 5. THAT if, for any cause, any meter shall be found to not be working properly, then the amount of wastewater to be charged for shall be estimated on the average reading for the previous months, when the meter was working properly, or, if unavailable or proven inaccurate, the amount of water to be charged for shall be estimated on a daily average when the meter is working properly, and the charge for the wastewater for the period during which the meter was not working properly shall be based thereon. 6. THAT variable rate charges for unbilled waste water due to a discrepancy will apply retroactively for the current year and the two years previous based on current year rates. If reasonable requests for access to repair metering equipment have been denied by the owner then retroactivity shall be to the date of the first request for access. 7. THAT where the water meter is equipped with a remote read-out unit of any type and a discrepancy occurs between the reading at the register of the water meter itself and the reading on the readout device the Town will deem the reading at the meter /

187 Page 3 of 4 BY-LAW NO to be correct and will adjust and correct the customer's account accordingly. 8. THAT the Treasurer or designate for the Town shall be responsible to carry out the financial provisions of this by-law and to administer this by-law. 9. THAT for the purpose of clarification, no exemptions from the wastewater rate shall be permitted solely because of tax exempt status under the Assessment Act. 10. THAT all amounts billed by the Billing Agent are due and payable to the Billing Agent as per the due date established. 11. THAT if for any reason fees owing under this by-law remains unpaid after the due date, same shall bear interest at the rate of 1.25% per month until paid in full. 12. THAT all amounts pertaining to water or wastewater services invoiced and owing to the Billing Agent and remain unpaid are considered a debt owing to the Town and, together with all interest and penalties accumulated thereupon, may be collected through appropriate actions or added to the property tax account and collected in the same manner as permitted under section 398 (2) of the Municipal Act, That By-law is hereby repealed on March 1, 2015 when By-law comes into effect. PASSED THIS 18 th DAY OF FEBRUARY, Gord Wauchope, Mayor Karen Fraser, Acting Clerk /

188 Page 4 of 4 BY-LAW NO SCHEDULE A Wastewater Rates Effective March 1, 2015 Annual Base Rates Residential Base $ Residential Flat $ Residential Mixed Use Base $ Residential Mixed Use Flat $ Commercial & Industrial Base $ Commercial and Industrial Flat $ 1, Institutional Base $ 5, Institutional Flat $ 8, Variable Rate Per Cubic Meter 1.30 Sandy Cove Acres 70% of Annual Residential Base Rate $ /

189 APPENDIX B Qualitative Analysis of Rate Structure Options

190 Appendix B Qualitative Analysis of Rate Structure Options Qualitative Analysis of Rate Structure Options Fixed fee A single flat fee applies to all customers Not beneficial in Innisfil where water meters are already in place and part of the normal operation. Major inequities exist because one flat fee applies regardless of water consumed or wastewater generated. Does not promote water conservation. This structure is not recommended for further consideration because it: - Is not fair and equitable as it does not consider water consumption or wastewater flows. - Does not utilize the Town current assets (water meters). - There is no economic incentive for customer to conserve. Uniform Rate This is a single unit price per cubic metre that applies to ALL customers regardless of customer type Widely accepted rate structure. Works well in situations where demand characteristics are similar across different customer types. Can be volatile as revenue is based entirely on consumption/flows. Simple to administer and understand compared to other structures. Promotes equity by having the same rate apply to all customers. User pay (customers pay for the amount of water consumed/ wastewater generated). Promotes conservation as customers pay more for higher consumption. Can have a fixed fee component (see next option). This structure is not recommended for further consideration because it: - Would result in significant cost increase to high volume users which is not consistent with the Industry Promotion principle. - Very volatile option that relies fully on consumption which could result in revenue shortfalls in wet years (decrease revenue stability).

191 Appendix B Qualitative Analysis of Rate Structure Options - Would require building a larger reserve to offset risk of revenue shortfall. Base Charge plus Uniform Rate The rate is comprised of a fixed portion regardless of consumption and a unit price portion based on consumption Provides stability in the revenue stream to the extent of the revenues generated from the base charge. This structure has all the benefits of a uniform rate including the promotion of conservation without the extreme revenue volatility. Structure currently employed by Innisfil. Declining Block Rate The unit price of water declines (in blocks) as consumption increases This structure is recommended for further consideration because it: - Would be used as a base against which other structures would be evaluated. - Would provide consistency from previous years. - Is understood by current users. - Promotes conservation while providing security of revenue Usually designed according to the demand patterns (and associated capacity needs) and cost of providing the service to each type of customer in order to maintain equity amongst customers. The number of size and number of blocks and the rate that applies to each block are normally designed according to the customer types and the differences between normal consumption and peak demand (i.e. the average to peak demand ratio needs to be determined for each customer type). Key assumption is that larger customers have more uniform consumption patterns than smaller (residential customers). Usually the first block is designed for residential and small commercial users. Additional blocks are geared to high consumption users such as industry and agriculture. Can be used as an economic incentive for higher consumption customers. Can have a minimum fixed fee component below a specified consumption volume. Applies in areas where the cost of managing the system declines with volume delivered to and used by customers. Viewed as a disincentive for conservation. General perception that declining rates tend to be a discount for higher volume water users and promotes wasteful uses.

192 Appendix B Qualitative Analysis of Rate Structure Options Generally not used where water supplies are limited or where promotion of conservation is desired. Frequently used (and works best) in cases where there is a good water supply and same rates apply to ALL customer types. Data on consumption patterns (normal and peak capacity needs) and costs specific to each type of customer needs to be acquired and maintained on a consistent basis for rate and block design and fairness. This aspect can be costly and complex. Generally provides a stable revenue stream if a base charge component is included. This structure is not recommended for further consideration because it: - Diminishes the existing economic incentive for conservation. Increasing Block Rate The Unit Price of Water increases (in blocks) as consumption increases Requires details on consumption by block and customer. Used in situations where avoidance of capacity expansions is necessary. More difficult to explain and communicate to users. Requires clear understanding of how customers might respond to different rates. Requires that the different types of customers can be easily differentiated. If applied equally to all customers, then it could result in inequities (especially to high volume users with uniform demand). Inequities can easily result if the time, effort and resources are not invested in acquiring all the necessary information. Perceived as promoting conservation particularly in areas of scarce water supplies. Revenues not as stable due to the fact that a greater proportion of revenues are dependent on higher volume water users that have the tendency to reduce consumption whenever possible. This structure is recommended for further consideration because it:

193 Appendix B Qualitative Analysis of Rate Structure Options - Increases the existing economic incentive for conservation. Seasonal Charge These are rates that are time based. Volumetric charge that is higher only for water used during the peak water demand season Rates tend to closely follow consumption patterns. Lower rates during lower consumption periods and higher rates apply to higher consumption periods. Seasonal consumption by customer type is required. Generally used to promote reduction of peak consumption. Customers may tend to shift consumption to off peak times if or when possible. Can be used as an incentive to conserve and is accepted in areas with short water supplies. However, other measures such as routine water restrictions during peak demand can achieve conservation without the complicating the water rate. More difficult to administer as the precise start and end point of each period may have to be clearly identified. Seasonal rates could be combined with other structures but increases complexity and ease of administration. Can be very volatile in terms of revenue stability depending on differences between season rates and customer response to higher rates. This rate structure was not considered further because it: Excessive Use Charge Volumetric charge that is higher for all demand during the peak water demand season in excess of a threshold - Requires detailed study of seasonal consumption patterns by customer type to achieve fairness and equity. - Can be very volatile ( i.e. not stable) due to seasonal consumption patterns - Is not equitable as it would increase the cost during the peak season to low volume water users where consumption is for essential needs and can t be adjusted. - Rates tend to closely follow consumption patterns. - Lower rates during lower consumption periods and higher rates apply to higher consumption periods. - Seasonal consumption by customer type is required. - Generally used to promote reduction of peak consumption. Customers may tend to shift consumption to off peak times if or when possible. - Used as an incentive to conserve and is accepted in areas with short water supplies. However, other measures such as routine water restrictions during peak demand can

194 Appendix B Qualitative Analysis of Rate Structure Options achieve conservation without the complicating the water rate. - Tends to be equitable from a demand perspective as those customers with higher peak demand are charged according to the costs of such demands. - More difficult to administer as the precise start and end point of each period may have to be clearly identified. - Can be very volatile in terms of revenue stability depending on differences between season rates and customer response to higher rates. This structure is recommended for further consideration because it: - Increases the existing economic incentive for conservation - It would not increase the cost during the peak season to low volume water users where consumption is uniform. - Would target the recovery of peak-demand-related costs from users that create the peak demand.

195 APPENDIX C Customer Growth Projections

196 Appendix C: Customer Growth Projections ( ) Wastewater Customer Growth Projection Customers Residential Non-Residential Total Number of Customers 9,557 9,793 10,106 10,482 10,886 11,320 11,781 12,242 12,981 13,998 15,014 16,033 16,958 17,791 18,623 19,457 20,291

197 APPENDIX D Wastewater Billing Volume Projections

198 Appendix D: Wastewater Billing Volume Projections ( ) Wastewater Billing Volume Projections Customer Class Residential 1,367,592 1,378,819 1,401,025 1,431,161 1,463,082 1,530,662 1,602,632 1,674,602 1,790,006 1,948,842 2,107,679 2,266,672 2,411,239 2,541,225 2,671,210 2,801,353 2,931,495 Commercial/Industrial 65,536 65,911 66,214 66,446 66,606 69,014 70,619 72,224 74,631 77,841 80,248 84,261 86,668 89,878 92,286 95,496 98,706 Residential Mixed Use 11,145 10,918 10,690 10,463 10,235 10,235 10,235 10,235 10,235 10,235 10,235 10,235 10,235 10,235 10,235 10,235 10,235 Institutional 25,049 24,538 24,026 23,515 23,004 23,004 23,004 23,004 23,004 23,004 23,004 23,004 23,004 23,004 23,004 23,004 23,004 Total Project Consumption 1,469,322 1,480,185 1,501,955 1,531,585 1,562,927 1,632,915 1,706,490 1,780,065 1,897,876 2,059,922 2,221,166 2,384,172 2,531,147 2,664,342 2,796,735 2,930,088 3,063,440

199 APPENDIX E Capital Forecast

200 Appendix E: Wastewater Capital Forecast ( ) Description Budget Forecast Capital Expenditures Budget Forecast Filter Gallery Wall Repair 15, Card Access Lakeshore WWTP 17, Waste Sludge Pump Replacement 50, UV Lamp Cleaning Tank 18, Aeration Tank Maintenance- Lakeshore Plant - 45, Sludge Handling Upgrade - 236, , Budget Forecast (Growth) Sanitary Pump Station No , Spring Street Sanitary Sewer 200, Leonards Beach Sewer Upgrades 649, Campus Node Sewer 2,773, Campus Node Sanitary Forcemain 1,880, Campus Node Sanitary Pumping Station - Phase 1 3,742, Innisfil Heights Sanitary Forcemain 2,163, Innisfil Heights Sanitary Pumping Station - Phase 1 2,538, Innisfil Heights Sewer -Phase 1 2,357, New Sewage Pump Station No. 2 (Phase 1) 3,796, Alcona South Sewer (6th Line from 20th Sideroad to SPS No. 2) 2,594, Decommissioning Existing Sewage Pump Station No. 2 - Sleeping Lion 328, New SPS No. 2 Forcemain (1st of twinned forcemain) 486, SPS G2 (Gilford Sewage Pump Station) - Land Acquisition 150, Sanitary Pump Station No , Spring Street Sanitary Sewer - - 1,543, Cookstown WW Pollution Control Plant - - 8,219, New SPS No. 2 (Extra Pump Installation) - - 1,804, New SPS No. 1 Forcemain (2nd of twinned forcemain) , Sanitary Pump Station No , Lakeshore Waste Water Treatment Plant Expansion ,995, Alcona Sewer Upgrades , Sewage Pump Station No.4 Forcemain ,399, Lefroy Belle-Ewart Sewer , Expand Sewage Pump Station No , Sewage Pump Station No. 3 Phase ,173, SPS G2 (Gilford Sewage Pump Station) - Land Acquisition , Sewage Pump Station No. 3 Forcemain , Sewage Pump Station No. 1 Forcemain ,629, Sewage Pump Station No. 3 Forcemain ,568, Sewage Pump Station No. 1 Forcemain Sewage Pump Station No. 4 - Phase Non-TCA Wastewater Rate Study Inflow and Infiltration Reduction Monitoring/Implementation (funded by DC) Inflow and Infiltration Reduction Monitoring/Implementation (funded by ARS Post-P DC) 200, , , , , , , , , Total Capital Expenditures - Capital Program 24,905, ,469 12,942, , ,426 90,915,534 6,144,455 2,699,411 3,773, Inventory Replacement from Inventory Sheets Lifecycle Needs Sanitary Sewers/Manholes - - 5, Sanitaty Forcemains Asset Pump Stations ,569, WPCP/Lagoons Total Capital Expenditures 24,905, ,469 12,948, , ,426 90,915,534 6,144,455 2,699,411 3,773, ,569, Capital Financing Provincial/Federal Grants/ ARS 197, , , , , , ,078 1,831, Gas Tax Funding External Contributions Development Charges 24,605, ,000 8,702, ,302-90,722,320 5,947, ,406 3,568, Non-Growth Related Debenture Requirements (0) (0) 0 0 (0) Growth Related Debenture Requirements Operating Contributions (Capital From Current) Wastewater Capital Reserve/Reserve Fund Continuity - #1 102, ,399 4,059, , ,569, Total Capital Financing 24,905, ,469 12,948, , ,426 90,915,534 6,144,455 2,699,411 3,773, ,569,

201 APPENDIX F Reserve Projections

202 Appendix F: Wastewater Reserve Projections ( ) Table F1-Wastewater Capital Reserve Fund Description Opening Balance 8,666,745 10,066,874 4,596,568 2,149,665 2,959,388 3,395,992 3,950,782 4,653,206 5,035,573 5,239,774 6,479,619 8,066,862 10,023,730 2,647,073 4,807,168 6,589,491 8,083,980 Transfer from Operating 1,628,817 1,349,104 1,585, , , , , ,904 20, , , , , ,180 1,097,759 1,390,746 1,682,444 Transfer to Stabilization Reserve Transfer to Water 6,600,000 Transfer from Water , , ,806 1,221,175 1,183,213 1,170,079 1,293, , Transfer to Capital 102, ,399 4,059, , ,569, Closing Balance 10,193,166 4,537,579 2,122,078 2,921,410 3,352,411 3,900,081 4,593,491 4,970,950 5,172,531 6,396,465 7,963,339 9,895,094 2,613,103 4,745,476 6,504,927 7,980,237 9,766,424 Interest 132,511 58,989 27,587 37,978 43,581 50,701 59,715 64,622 67,243 83, , ,636 33,970 61,691 84, , ,964 Table F2-Wastewater Development Charges Reserve Fund Description Opening Balance 506,485-1,306,780 (0) 1,358,188 2,968,017 0 (0) 577,150 (0) 1,923,261 3,909,991 5,961,782 8,080,265 10,267,109 12,524,018 14,852,735 Development Charge Proceeds 1,461,000 1,545,010 1,578,780 1,606,060 1,571,740 1,670,320 1,704,660 1,438,150 1,858,130 1,898,580 1,936, ,975, ,014, ,055, ,096, ,138, ,180, Transfer to Capital 24,605, ,000 8,702, ,302-90,722,320 5,947, ,406 3,568, Front-End Financing 22,637,679 5,817,056 86,083,983 4,242,716 1,132,774 Transfer to Operating Closing Balance - 1,290,010 (0) 1,340,758 2,929,928 0 (0) 569,744 (0) 1,898,580 3,859,813 5,885,273 7,976,570 10,135,350 12,363,295 14,662,127 17,033,606 Interest - 16,770 (0) 17,430 38,089 0 (0) 7,407 (0) 24,682 50,178 76, , , , , ,437 Table F3-Wastewater Lifecycle Reserve Fund Description Opening Balance ,013,000 2,545,669 4,098,263 5,671,040 7,770,764 10,404,284 13,072,039 16,280,976 19,531,628 22,824,540 26,666,759 30,558,926 34,501,693 Transfer from Operating ,000,000 1,500,000 1,500,000 1,500,000 2,000,000 2,500,000 2,500,000 3,000,000 3,000,000 3,000,000 3,500,000 3,500,000 3,500,000 3,500,000 Transfer to Capital Transfer to Operating Closing Balance ,000,000 2,513,000 4,045,669 5,598,263 7,671,040 10,270,764 12,904,284 16,072,039 19,280,976 22,531,628 26,324,540 30,166,759 34,058,926 38,001,693 Interest ,000 32,669 52,594 72,777 99, , , , , , , , , ,022 Table F4-Projected Operating Reserve Balance Stabilization Reserve Opening Balance (31,529) (0) 15,000 30,000 45,001 60,001 75,001 90, , , , , , , , ,001 Transfer From Capital Reserve (Contributions from) Operating Budget to Offset Surplus - (Cash Inflow) - 31,529 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15, Contributions from Operating Budget - (Cash Inflow) Contributions to Operating Budget - (Cash Outflow) (Contributions to) Operating Budget to Offset Deficit- (Cash Outflow) 31, Rate Stabilization Reserve Closing Balance (31,529) (0) 15,000 30,000 45,001 60,001 75,001 90, , , , , , , , , ,001

203 APPENDIX G Operations & Maintenance Projections

204 Appendix G: Wastewater Operations & Maintenance Projections ( ) Description 2015 Budget Forecast Operating Expenditures Total Wastewater Administration 986,955 1,015,396 1,045,223 1,066,127 1,087,450 1,109,199 1,131,383 1,154,011 1,177,091 1,200,633 1,224,645 1,249,138 1,274,121 1,299,603 1,325,595 1,352,107 1,379,150 Total Cookstown - Sewer Line Mainten 21,010 21,454 21,922 22,360 22,808 23,264 23,729 24,204 24,688 25,181 25,685 26,199 26,723 27,257 27,802 28,358 28,926 Total Cookstown Wastewater Treatment 157, , , , , , , , , , , , , , , , ,319 Total Lakeshore - Pump Stations 201, , , , , , , , , , , , , , , , ,547 Total Lakeshore - Sewer Line Mainten 197, , , , , , , , , , , , , , , , ,184 Total Lakeshore Wastew Treatment Plt 1,292,606 1,335,536 1,375,793 1,403,309 1,431,375 1,460,003 1,489,203 1,518,987 1,549,366 1,580,354 1,611,961 1,644,200 1,677,084 1,710,626 1,744,838 1,779,735 1,815,330 Total Compliance 177, , , , , , , , , , , , , , , , ,530 Total Wastewater Fleet 21,273 22,035 22,846 23,303 23,769 24,244 24,729 25,224 25,728 26,243 26,768 27,303 27,849 28,406 28,974 29,554 30, Water Conservation and Efficiency Staff 31,530 40,331 41,137 41,960 42,799 43,655 44,528 45,419 46,327 47,254 48,199 49,163 50,146 51,149 52,172 53,216 54, Incremental Hydro/Chemicals (to be added in the Model) ,283 16,171 36,093 37,043 36,155 56,609 74,492 69,658 66,613 57,075 49,695 47,865 46,848 45, Rate Stabilization Contributions Transfer to Operating Reserve Sub Total Operating Expenditures 3,087,222 3,253,546 3,342,539 3,424,673 3,493,749 3,583,222 3,655,115 3,726,588 3,820,852 3,914,019 3,985,976 4,061,257 4,131,612 4,205,723 4,287,013 4,370,779 4,456,020 Capital-Related Existing Debt (Principal) - Non-Growth Related Existing Debt (Interest) - Non-Growth Related Existing Debt (Principal) - Growth Related Existing Debt (Interest) - Growth Related New Non-Growth Related Debt (Principal) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) (0) New Non-Growth Related Debt (Interest) (0) (0) (0) 0 (0) (0) New Growth Related Debt (Principal) New Growth Related Debt (Interest) Transfer to Capital Budget Transfer to Capital Reserves and Reserve Funds 1,628,817 1,349,104 1,585, , , , , ,904 20, , , , , ,180 1,097,759 1,390,746 1,682,444 Transfer to Lifecycle Reserve 1,000,000 1,500,000 1,500,000 1,500,000 2,000,000 2,500,000 2,500,000 3,000,000 3,000,000 3,000,000 3,500,000 3,500,000 3,500,000 3,500,000 Sub Total Capital Related Expenditures 1,628,817 1,349,104 1,585,475 1,771,745 1,893,022 2,004,089 2,142,708 2,281,904 2,520,334 2,881,886 3,262,545 3,645,018 3,988,331 4,305,180 4,597,759 4,890,746 5,182,444 Total Expenditures 4,716,039 4,602,650 4,928,014 5,196,418 5,386,771 5,587,311 5,797,824 6,008,492 6,341,186 6,795,905 7,248,521 7,706,275 8,119,943 8,510,903 8,884,772 9,261,525 9,638,464 Non-Rate Revenues Administration Fees 12,000 12,000 12,000 12,240 12,485 12,734 12,989 13,249 13,514 13,784 14,060 14,341 14,628 14,920 15,219 15,523 15, Penalties & Interest (Non-Tax) 18,000 18,000 18,000 18,360 18,727 19,102 19,484 19,873 20,271 20,676 21,090 21,512 21,942 22,381 22,828 23,285 23, Septic Receiving Fees 116, , , , , , , , , , , , , , , , , Investment Income 110, , , , , , , , , , , , , , , , , Other Rev(External Recoveries) 4,000 4,000 4,000 4,080 4,162 4,245 4,330 4,416 4,505 4,595 4,687 4,780 4,876 4,973 5,073 5,174 5, Misc. Revenue 5,790 5,790 3,180 3,244 3,308 3,375 3,442 3,511 3,581 3,653 3,726 3,800 3,876 3,954 4,033 4,114 4, Salaries/Ben. Internal Chgs 85, , , , , , , , , , , , , , , , , Total-Non Rate Revenues 351, , , , , , , , , , , , , , , , ,927 Operating Subsidies Contributions from Development Charges Reserve Fund Contributions from WWTP Reserve Fund Contributions from Capital Reserves / Reserve Funds - # Contributions from Capital Reserves / Reserve Funds - # Contributions from Operating Reserve Total Operating Revenue 351, , , , , , , , , , , , , , , , ,927 Net Wastewater Costs To Be Recovered From Users 4,364,497 4,234,890 4,560,500 4,821,554 5,004,410 5,197,303 5,400,015 5,602,727 5,927,305 6,373,747 6,817,919 7,267,062 7,671,945 8,053,945 8,418,675 8,786,106 9,153,537

205 APPENDIX H Base Charge Projections

206 Appendix H: Wastewater Base Charge Projections ( ) Projected Base Wastewater Base Charges Customer Type Annual % Increase 6% 6% 6% 4% 2% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Residential (Sewer Only) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Residential (Mixed Use Sewer Only) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Residential (Water & Sewer) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Residential (Mixed Use Water & Sewer) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Residential (Sandy Cove) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Commercial & Industrial (Sewer Only) $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, Commercial & Industrial (Water & Sewer) $ $ $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, Institutional (Sewer Only) $8, $9, $9, $10, $10, $10, $10, $10, $10, $10, $10, $10, $10, $10, $10, $10, $10, Institutional (Water & Sewer) $5, $5, $5, $6, $6, $6, $6, $6, $6, $6, $6, $6, $6, $6, $6, $6, $6, Water Treatment Plant $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1, $1,748.45

207 APPENDIX I Consumption Wastewater Rate Projections

208 Appendix I: Consumption Wastewater Rate Projections ( ) Option Description Annual % Increase 4% 4% 2% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Option 1 UNIFORM RATE $1.30 $1.36 $1.41 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 INCREASING BLOCK RATE (All Users Year Round) Projected Consumption Wastewater Rates for the Years Option 2 Annual % Increase 0% 5% 3% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Block 1 (87% of Billed Wastewater Flows) $1.30 $1.30 $1.36 $1.40 $1.42 $1.42 $1.42 $1.42 $1.42 $1.42 $1.43 $1.43 $1.43 $1.43 $1.43 $1.43 $1.43 Block 2 (13% of Billed Watewater Flows) $1.95 $2.04 $2.11 $2.13 $2.13 $2.13 $2.13 $2.13 $2.14 $2.14 $2.14 $2.14 $2.14 $2.14 $2.14 $2.14 INCREASING BLOCK RATE (Residential Users Only Year Round) Option 3 Annual % Increase 2% 5% 3% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Block 1 (92% of Billed Wastewater Flows) $1.30 $1.33 $1.39 $1.43 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 Block 2 ( 8% of Billed Watewater Flows) $1.99 $2.09 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 EXCESSIVE USE CHARGE (Residential Users Only During Peak Demand-June to September) Option 4 Annual % Increase 3% 4% 2% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Block 1 (96% of Billed Wastewater Flows) $1.30 $1.34 $1.40 $1.43 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 Block 2 ( 4% of Billed Watewater Flows) $2.01 $2.10 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15

209 APPENDIX J Residential Customer Impacts

210 Appendix J: Residential Customer Impacts ( ) Annual Base Charge Option 1 (Constant Rate) $173 $183 $194 $202 $206 $206 $206 $206 $206 $206 $206 $206 $206 $206 $206 $206 $206 Annual Consumptive Charge $227 $236 $245 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 Total Annual Residential Bill (Option 1) $400 $419 $440 $452 $457 $457 $457 $457 $457 $457 $457 $457 $457 $457 $457 $457 $457 Annual Bill Increase ($) $19 $19 $20 $13 $4 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 5% 5% 5% 3% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Option 2 (Increasing Block) Annual Base Charge $173 $183 $194 $202 $206 $206 $206 $206 $206 $206 $206 $206 $206 $206 $206 $206 $206 Annual Consumptive Charge $227 $226 $237 $244 $247 $247 $247 $247 $247 $248 $248 $248 $248 $248 $248 $249 $249 Total Annual Residential Bill (Option 2) $400 $409 $431 $446 $453 $453 $453 $453 $454 $454 $454 $454 $454 $455 $455 $455 $455 Annual Bill Increase ($) $19 $9 $22 $15 $7 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 5% 2% 5% 3% 2% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Option 3 (Increasing Block -Residential Only) Residential Customer Impacts for the Years Annual Base Charge $173 $183 $194 $202 $206 $206 $206 $206 $206 $206 $206 $206 $206 $206 $206 $206 $206 Annual Consumptive Charge $227 $231 $242 $249 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 Total Annual Residential Bill (Option 3) $400 $414 $437 $451 $456 $456 $456 $456 $456 $456 $456 $456 $456 $456 $456 $456 $456 Annual Bill Increase ($) $19 $14 $22 $14 $5 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 5% 4% 5% 3% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Option 4 (Excessive Use Charge) Annual Base Charge $173 $183 $194 $202 $206 $206 $206 $206 $206 $206 $206 $206 $206 $206 $206 $206 $206 Annual Consumptive Charge $227 $233 $243 $249 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 $250 Total Annual Residential Bill (Option 4) $400 $416 $437 $451 $456 $456 $456 $456 $456 $456 $456 $456 $456 $456 $456 $456 $456 Annual Bill Increase ($) $19 $16 $21 $14 $5 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 5% 4% 5% 3% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Summary of Residential Customer Annual Wastewater Charge Option 1 (Constant Rate) $400 $419 $440 $452 $457 $457 $457 $457 $457 $457 $457 $457 $457 $457 $457 $457 $457 Option 2 (Increasing Block) $400 $409 $431 $446 $453 $453 $453 $453 $454 $454 $454 $454 $454 $455 $455 $455 $455 Option 3 (Increasing Block -Residential Only) $400 $414 $437 $451 $456 $456 $456 $456 $456 $456 $456 $456 $456 $456 $456 $456 $456 Option 4 (Excessive Use Charge) $400 $416 $437 $451 $456 $456 $456 $456 $456 $456 $456 $456 $456 $456 $456 $456 $456

211 APPENDIX K Commercial Customer Impacts

212 Appendix K: Commercial Customer Impacts ( ) Annual Base Charge Option 1 (Constant Rate) $935 $991 $1,050 $1,092 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 Annual Consumptive Charge $1,043 $1,085 $1,128 $1,151 $1,151 $1,151 $1,151 $1,151 $1,151 $1,151 $1,151 $1,151 $1,151 $1,151 $1,151 $1,151 $1,151 Total Annual Commercial/Industrial Bill (Option 1) $1,978 $2,076 $2,179 $2,243 $2,265 $2,265 $2,265 $2,265 $2,265 $2,265 $2,265 $2,265 $2,265 $2,265 $2,265 $2,265 $2,265 Annual Bill Increase ($) $93 $98 $103 $65 $22 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 5% 5% 5% 3% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Option 2 (Increasing Block) Annual Base Charge $935 $991 $1,050 $1,092 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 Annual Consumptive Charge $1,043 $1,362 $1,430 $1,474 $1,490 $1,491 $1,491 $1,492 $1,493 $1,495 $1,496 $1,497 $1,498 $1,499 $1,499 $1,500 $1,500 Total Annual Commercial/Industrial Bill (Option 2) $1,978 $2,353 $2,481 $2,566 $2,604 $2,605 $2,606 $2,607 $2,608 $2,609 $2,611 $2,612 $2,613 $2,613 $2,614 $2,614 $2,615 Annual Bill Increase ($) $93 $375 $128 $86 $38 $1 $1 $1 $1 $1 $1 $1 $1 $1 $1 $0 $0 Annual Bill Increase (%) 5% 19% 5% 3% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Option 3 (Increasing Block -Residential Only) Commercial Customer Impacts for the Years Annual Base Charge $935 $991 $1,050 $1,092 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 Annual Consumptive Charge $1,043 $1,062 $1,115 $1,144 $1,148 $1,148 $1,148 $1,149 $1,149 $1,149 $1,149 $1,149 $1,149 $1,149 $1,149 $1,149 $1,149 Total Annual Commercial/Industrial Bill (Option 3) $1,978 $2,053 $2,165 $2,237 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 Annual Bill Increase ($) $93 $75 $112 $71 $26 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 5% 4% 5% 3% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Option 4 (Excessive Use Charge) Annual Base Charge $935 $991 $1,050 $1,092 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 $1,114 Annual Consumptive Charge $1,043 $1,071 $1,118 $1,144 $1,148 $1,148 $1,148 $1,149 $1,149 $1,149 $1,149 $1,149 $1,149 $1,149 $1,149 $1,149 $1,149 Total Annual Commercial/Industrial Bill (Option 4) $1,978 $2,062 $2,168 $2,237 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 Annual Bill Increase ($) $93 $84 $106 $68 $26 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 5% 4% 5% 3% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Summary of Commercial/Industrial Customer Annual Wastewater Charge Option 1 (Constant Rate) $1,978 $2,076 $2,179 $2,243 $2,265 $2,265 $2,265 $2,265 $2,265 $2,265 $2,265 $2,265 $2,265 $2,265 $2,265 $2,265 $2,265 Option 2 (Increasing Block) $1,978 $2,353 $2,481 $2,566 $2,604 $2,605 $2,606 $2,607 $2,608 $2,609 $2,611 $2,612 $2,613 $2,613 $2,614 $2,614 $2,615 Option 3 (Increasing Block -Residential Only) $1,978 $2,053 $2,165 $2,237 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 Option 4 (Excessive Use Charge) $1,978 $2,062 $2,168 $2,237 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263 $2,263

213 APPENDIX L Institutional Customer Impacts

214 Appendix L: Institutional Customer Impacts ( ) Annual Base Charge Option 1 (Constant Rate) $5,339 $5,660 $5,999 $6,239 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 Annual Consumptive Charge $5,543 $5,764 $5,995 $6,115 $6,115 $6,115 $6,115 $6,115 $6,115 $6,115 $6,115 $6,115 $6,115 $6,115 $6,115 $6,115 $6,115 Total Annual Institutional Bill (Option 1) $10,882 $11,424 $11,994 $12,354 $12,479 $12,479 $12,479 $12,479 $12,479 $12,479 $12,479 $12,479 $12,479 $12,479 $12,479 $12,479 $12,479 Annual Bill Increase ($) $515 $542 $570 $360 $125 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 5% 5% 5% 3% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Option 2 (Increasing Block) Annual Base Charge $5,339 $5,660 $5,999 $6,239 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 Annual Consumptive Charge $5,543 $8,075 $8,479 $8,738 $8,834 $8,837 $8,842 $8,847 $8,854 $8,863 $8,871 $8,877 $8,882 $8,886 $8,890 $8,892 $8,895 Total Annual Institutional Bill (Option 2) $10,882 $13,734 $14,478 $14,977 $15,198 $15,201 $15,206 $15,211 $15,218 $15,227 $15,235 $15,241 $15,246 $15,250 $15,254 $15,256 $15,259 Annual Bill Increase ($) $515 $2,852 $744 $499 $221 $3 $5 $5 $7 $9 $9 $5 $6 $3 $4 $3 $2 Annual Bill Increase (%) 5% 26% 5% 3% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Option 3 (Increasing Block -Residential Only) Institutional Customer Impacts for the Years Annual Base Charge $5,339 $5,660 $5,999 $6,239 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 Annual Consumptive Charge $5,543 $5,642 $5,922 $6,078 $6,101 $6,101 $6,101 $6,101 $6,101 $6,101 $6,101 $6,101 $6,102 $6,102 $6,102 $6,102 $6,102 Total Annual Institutional Bill (Option 3) $10,882 $11,301 $11,921 $12,318 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,466 $12,466 $12,466 Annual Bill Increase ($) $515 $419 $620 $397 $148 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 5% 4% 5% 3% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Option 4 (Excessive Use Charge) Annual Base Charge $5,339 $5,660 $5,999 $6,239 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 $6,364 Annual Consumptive Charge $5,543 $5,690 $5,938 $6,078 $6,101 $6,101 $6,101 $6,101 $6,101 $6,101 $6,101 $6,101 $6,102 $6,102 $6,102 $6,102 $6,102 Total Annual Institutional Bill (Option 4) $10,882 $11,350 $11,937 $12,318 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,466 $12,466 $12,466 Annual Bill Increase ($) $515 $468 $587 $380 $148 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Annual Bill Increase (%) 5% 4% 5% 3% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Summary of Institutional Customer Annual Wastewater Charge Option 1 (Constant Rate) $10,882 $11,424 $11,994 $12,354 $12,479 $12,479 $12,479 $12,479 $12,479 $12,479 $12,479 $12,479 $12,479 $12,479 $12,479 $12,479 $12,479 Option 2 (Increasing Block) $10,882 $13,734 $14,478 $14,977 $15,198 $15,201 $15,206 $15,211 $15,218 $15,227 $15,235 $15,241 $15,246 $15,250 $15,254 $15,256 $15,259 Option 3 (Increasing Block -Residential Only) $10,882 $11,301 $11,921 $12,318 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,466 $12,466 $12,466 Option 4 (Excessive Use Charge) $10,882 $11,350 $11,937 $12,318 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,465 $12,466 $12,466 $12,466

215 APPENDIX M Customer Impacts Over Base Option

216 Appendix M: Customer Impacts Over Base Option ( ) Customer Impact over Base Option - Option 2 (Increasing Block) Customer Class Residential $0 ($10) ($8) ($6) ($3) ($3) ($3) ($3) ($3) ($3) ($2) ($2) ($2) ($2) ($2) ($2) ($2) Commercial/Industrial $0 $277 $302 $323 $339 $340 $340 $341 $342 $344 $345 $346 $347 $348 $348 $349 $349 Institutional $0 $2,310 $2,484 $2,623 $2,719 $2,722 $2,728 $2,732 $2,739 $2,748 $2,757 $2,762 $2,767 $2,771 $2,775 $2,778 $2,780 Customer Impact over Base Option - Option 3 (Increasing Block -Residential Only) Customer Class Residential $0 ($5) ($3) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) Commercial/Industrial $0 ($23) ($14) ($7) ($3) ($3) ($3) ($3) ($3) ($3) ($3) ($3) ($3) ($3) ($3) ($3) ($3) Institutional $0 ($123) ($73) ($36) ($13) ($13) ($13) ($13) ($13) ($13) ($13) ($13) ($13) ($13) ($13) ($13) ($13) Customer Impact over Base Option - Option 4 (Excessive Use Charge) Customer Class Residential $0 ($3) ($2) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) ($1) Commercial/Industrial $0 ($14) ($11) ($7) ($3) ($3) ($3) ($3) ($3) ($3) ($3) ($3) ($3) ($3) ($3) ($3) ($3) Institutional $0 ($74) ($57) ($36) ($13) ($13) ($13) ($13) ($13) ($13) ($13) ($13) ($13) ($13) ($13) ($13) ($13)

217 APPENDIX N Projected Base Charges and Consumption Rates

218 Appendix N: Projected Base Charges and Consumption Rates ( ) Projected Wastewater Base Charges by Customer Type for the Years Customer Type Annual % Increase 6% 6% 4% 2% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Residential (Sewer Only) $ $ $ $ $ $ $ $ Residential (Mixed Use Sewer Only) $ $ $ $ $ $ $ $ Residential (Water & Sewer) $ $ $ $ $ $ $ $ Residential (Mixed Use Water & Sewer) $ $ $ $ $ $ $ $ Residential (Sandy Cove) $ $ $ $ $ $ $ $ Commercial & Industrial (Sewer Only) $1, $1, $1, $1, $1, $1, $1, $1, , , , , , , , , , Commercial & Industrial (Water & Sewer) $ $ $1, $1, $1, $1, $1, $1, , , , , , , , , , Institutional (Sewer Only) $8, $9, $9, $10, $10, $10, $10, $10, , , , , , , , , , Institutional (Water & Sewer) $5, $5, $5, $6, $6, $6, $6, $6, , , , , , , , , , Water Treatment Plant $1, $1, $1, $1, $1, $1, $1, $1, , , , , , , , , , Option Description INCREASING BLOCK RATE (Residential Users Only Year Round) Projected Consumption Wastewater Rates for the Years Option 3 Annual % Increase 2% 5% 3% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Block 1 Consumption Rate $1.30 $1.33 $1.39 $1.43 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 $1.44 Block 2 Consumption Rate $1.99 $2.09 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15 $2.15

219 APPENDIX O Requirements of Ontario Regulation 453/07

220 Appendix O: Requirements of Ontario Regulation 453/07 Note: It is assumed that the Requirements of O.Reg 453/07 would apply to Wastewater Requirements 1. The financial plans must be approved by a resolution that is passed by, i. The council of the municipality, if the owner of the drinking water system is a municipality. How Requirements are Met The Financial Plan will be presented to Council for approval on July 21, 2014 ii. The governing body of the owner, if the owner of the wastewater system has a governing body and is not a municipality. N/A 2. The financial plans must apply to a period of at least six years. 3. The first year to which the financial plans must apply must be the year determined in accordance with the following rules: Applies for 6 years from 2015 to 2020 inclusive. i. If the financial plans are required by subsection 2, the first year to which the financial plans must apply must be the year in which the wastewater system s existing municipal licence would otherwise expire. ii. If the financial plans are required by a condition that was included in a municipal wastewater licence under subsection 1 (3), the first year to which the financial plans must apply must be the later of 2010 and the year in which the first licence for the system was issued. 4. Subject to subsection (2), for each year to which the financial plans apply, the financial plans must include the following: i. Details of the proposed or projected financial position of the wastewater system itemized by: See Table 4-1 Statement of Financial Position in Financial Plan. a. Total financial assets See Table 4-1 Statement of Financial Position in Financial Plan. N/A N/A b. Total liabilities See Table 4-1 Statement of Financial Position in Financial Plan. c. Net financial assets (debt) See Table 4-1 Statement of Financial Position in Financial Plan. d. Non-financial assets that are tangible capital assets, tangible capital assets under construction, inventories of supplies and prepaid expenses. See Table 4-1 Statement of Financial Position in Financial Plan. TCA Projections in Financial Plan. e. Changes in tangible capital assets that are additions, donations, write downs and disposals. See Table 4-1 Statement of Financial Position in Financial Plan. TCA Projections in Financial Plan.

221 Appendix O: Requirements of Ontario Regulation 453/07 Note: It is assumed that the Requirements of O.Reg 453/07 would apply to Wastewater ii. iii. Details of the proposed or projected financial operations of the wastewater system itemized by, a. Total revenues, further itemized by wastewater rates, user charges and other revenues. b. Total expenses, further itemized by amortization expenses, interest expenses and other expenses See Table 4-2 Statement of Operations in Financial Plan. See Table 4-2 Statement of Operations in Financial Plan. See Table 4-2 Statement of Operations in Financial Plan. c. Annual surplus or deficit, and See Table 4-2 Statement of Operations in Financial Plan. d. Accumulated surplus or deficit See Table 4-2 Statement of Operations for both water systems combined in Financial Plan. Details of the wastewater system s proposed or projected gross cash receipts and gross cash payments itemized by, See Table 4-3 Statement of Cash Flow in Financial Plan. a. Operating transactions that are cash received from revenues, cash paid for operating expenses and finance charges, - done in full cost report See Table 4-3 Statement of Cash Flow in Financial Plan. b. Capital transactions that are proceeds on the sale of tangible capital assets and cash used to acquire capital assets, See Table 4-3 Statement of Cash Flow for both water systems combined in Financial Plan. c. Investing transactions that are acquisitions and disposal of investments, d. Financing transactions that are proceeds from the issuance of debt and debt repayment. e. Changes in cash and cash equivalents during the year, f. Cash and cash equivalents at the beginning and end of the year. See Table 4-3 Statement of Cash Flow in Financial Plan. See Table 4-3 Statement of Cash Flow in Financial Plan. See Table 4-3 Statement of Cash Flow in Financial Plan. See Table 4-3 Statement of Cash Flow in Financial Plan. iv. Details of the extent to which the information described in subparagraphs i, ii and iii relates directly to the replacement of lead service pipes as defined in section of Schedule 15.1 to Ontario Regulation 170/03 (Drinking Water Systems), made under the Act. N/A 5. The owner of the wastewater system must. i. Make the financial plans available, on request, to members of the public who are served by the wastewater system without charge, ii. Make the financial plans available to members of the public without charge through publication on the Internet, if the owner maintains a website on the Internet, This will be done by the Town of Niagara-on-the- Lake following Council approval. The Financial Plan will be posted on the Town of Niagara-on-the-Lake s website and made available for public review at no charge.

222 Appendix O: Requirements of Ontario Regulation 453/07 Note: It is assumed that the Requirements of O.Reg 453/07 would apply to Wastewater iii. Provide notice advising the public of the availability of the financial plans under subparagraphs i and ii, if applicable, in a manner that, in the opinion of the owner, will bring the notice to the attention of members of the public who are served by the wastewater system. 6. The owner of the wastewater system must give a copy of the financial plans to the Ministry of Municipal Affairs and Housing. O. Reg. 453/07, s. 3 (1). Each of the following sub-subparagraphs applies only if the information referred to in the subsubparagraph is known to the owner at the time the financial plans are prepared. A notice will be issued following Council approval. N/A The Financial Plan was prepared using available information at the time of preparation and may not contain all desired items. Reasonable assumptions were made and these are noted in the Financial Plan. 1. Sub-subparagraphs 4 i A, B and C of subsection (1). The Financial Plan was prepared using available information at the time of preparation and may not contain all desired items. Reasonable assumptions were made and these are noted in the Financial Plan. 2. Sub-subparagraphs 4 iii A, C, E and F of subsection (1). O. Reg. 453/07, s. 3 (2). The Financial Plan was prepared using available information at the time of preparation and may not contain all desired items. Reasonable assumptions were made and these are noted in the Financial Plan.

223 Municipal Services Corporation and Utility Approach for Water and Wastewater Business Case Appendix F: Legal Letter Concerning Municipal Services Corporation PwC

224 Donald B. Johnston Partner Direct: April 27, 2015 BY Council of the 2101 Innisfil Beach Road Innisfil, ON L9S 1A1 Dear Sirs and Mesdames: Re: Legal Rationale for Formation of Municipal Services Corporation You have asked us to provide you with the legal rationale for our recommendation of the incorporation of a municipal services corporation for the Town. The prime legal need for a municipal services corporation is that the Town cannot, by law, exceed its debt capacity. Section 3 of Ontario Regulation 403/02 establishes a formula for the calculation of municipal debt and financial obligation limits. Although the formula is complex, the debt capacity of the Town would be about one quarter of its revenue, or $60 million. However, the provincially designated Innisfil Heights Strategic Settlement Employment Area requires approximately $150 million in servicing infrastructure. Consequently, the Town is not in a legal position to finance the differential, even if debt financing were available to it. Section 203(1) of the Municipal Act, 2001 authorizes the Town to establish corporations. Section 3(a) of Regulation 599 made under that Act goes on to say that the purpose, among others, of such a corporation (referred to as a municipal services corporation ) must be to provide a system, service or thing that the municipality itself could provide. In this case, the proposed purpose of the municipal services corporation is to create a utility for the management of water and waste water infrastructure. The corporation would be owned by the Town and accountable to it as shareholder. The corporation would take over ownership and operation of the water and waste water assets pursuant to an asset transfer policy that the Town would adopt and impose on the corporation. Pursuant to subsection 21 (3) of Regulation 599, the municipal services corporation would be deemed

225 April 30, 2015 Page 2 to be a local board for purposes of the Development Charges Act, 1997, and so would be entitled to collect development charges under that Act. The creation of a municipal services corporation would enable the removal of the infrastructure financing costs from the Town s financial statements and the pushing of the obligations for infrastructure financing over to the corporation, which would then be free to seek financing for infrastructure development free of the Town s debt ceiling limits. We also recommend that the Town incorporate a holding corporation, which the Town would own, for the purpose of owning the Town s shares in the new municipal services corporation. The reason for this is that any dividends that are declared by the municipal services corporation in favour of the holding corporation could easily be provided back to the municipal services corporation, thereby avoiding any allegation that the Town is providing a municipal subsidy to the municipal services corporation. Absent a holding company, a provision by the Town to the municipal services corporation could well be characterized as a subsidy that could negatively affect the Town s ability to obtain financing for its operations. We looked carefully at other options for the Town 1, including the use of Innpower (formerly Innisfil Hydro Distribution Systems Limited) to operate the water and wastewater utility. We found, as a matter of law, that the Electricity Act only permits Innpower to generate, distribute, transmit or retail electricity. Clearly that list does not include water and wastewater, and so a transfer of water and wastewater assets and employees to Innpower would not be permitted. Furthermore, Innpower is obliged to make payments in lieu of taxes on its profits and therefore should be regarded as being a taxable entity. A municipal services corporation, however, is completely non-taxable, which we regard as a preferable status for the proposed new corporation. Accordingly, it has been our firm legal recommendation to Council that the Town cannot finance its growth commitment without the creation of a separate municipal services corporation to own and operate the Town s water and waste water infrastructure and without the creation of a holding company to own and hold the Town s interest in the municipal services corporation. 1 Specifically, the Municipal Act, 2001, the Municipal Services Corporation Regulation (referred to above as Regulation 599, the Business Corporations Act (Ontario), the Corporations Act (Ontario), the Income Tax Act (Canada), the Electricity Act, 1998 (Ontario), the Public Utilities Act (Ontario), the Ontario Energy Board Act, 1998 (Ontario), the Safe Drinking Water Act, 2002 (Ontario), the Eligible Investments Regulation and the recent Not-for-Profit Corporations Act, 2010 (Ontario). We also looked into a number of different capital structures and business models before making our recommendation outlined in this letter.

226 April 30, 2015 Page 3 Please let us know if you have any questions with respect to our advice. Yours truly, AIRD & BERLIS LLP Donald B. Johnston DBJ/ab

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