YORK COUNTY, SOUTH CAROLINA

Transcription

1 YORK COUNTY, SOUTH CAROLINA Water and Sewer Financial Planning and Rate Study Report October 25, 2017

2 1031 S. Caldwell Street Suite 100 Charlotte, NC Phone Fax October 25, 2017 Mr. Eric Rekitt Public Works Director 6 S Congress Street York County, SC Dear Mr. Rekitt: Raftelis Financial Consultants, Inc. (RFC) was engaged by York County, South Carolina (County) to perform a Water and Sewer Financial Planning and Rate Study (Study). As part of our Study, RFC developed a Utility Rate and Financial Planning Model (Model) for the County, which provides a projection of operating and maintenance expenses based on the estimated fiscal year (FY) 2017 Operating Budget and capital costs based on annual debt service, pay-as-you-go cash funding, and future debt service. The Model also incorporates a financial planning component that includes the capital projects proposed over the planning horizon. Finally, the Model includes a module to assess the customer impacts of the recommended rates and on-going program of rate adjustments. This letter documents the results and findings of the Study for the forecast period FY 2017 FY The proposed rates for FY 2017 and thereafter are consistent with industry standards and pricing practices and designed to meet the forecast of annual revenue requirements. The projected revenue requirements over the planning period are based on reasonable assumptions and prudent financial policies and objectives. We have enjoyed the opportunity to provide assistance to the County. If you have any questions, comments, or concerns, please do not hesitate to contact me at (704) Sincerely, RAFTELIS FINANCIAL CONSULTANTS, INC. Bart Kreps Senior Manager Utility Rate Study Report i

3 Table of Contents 1. INTRODUCTION... 1 BACKGROUND OF THE UTILITIES... 1 SCOPE OF SERVICES RATE SETTING PROCESS FINANCIAL PLAN... 5 REVENUE REQUIREMENTS... 5 Operating Expenses... 5 Capital Improvement Plan... 6 Debt Service Obligations... 7 Water Revenue Requirements... 8 Sewer Revenue Requirements... 9 REVENUES Demand for Services User Charge Revenues Other Operating & Non-Operating Revenues REVENUE SUFFICIENCY Debt Service Coverage FUND BALANCES Operating Fund COST ALLOCATIONS PROPOSED RATE ADJUSTMENTS EXISTING RATES PROPOSED RATE STRUCTURE ADJUSTMENTS Base Charge CUSTOMER IMPACTS ii York County, South Carolina

4 LIST OF EXHIBITS AND TABLES Exhibit 1 Rate Setting Process... 3 Table 1: Operating Expenses... 6 Table 2: Capital Improvement Plan Projects and Funding Sources... 7 Table 3: Existing Debt Service... 7 Table 4: Existing and Proposed Debt Service... 8 Table 5: Water System Revenue Requirements... 9 Table 6: Sewer System Revenue Requirements...10 Table 7: Projected Customer Accounts...12 Table 8: Projected Customer Usage...13 Table 9: Projected Rate Increases...14 Table 10: Revenue Sufficiency...16 Table 11: Fund Balances...17 Table 12: Water & Sewer Rate Calculation...19 Table 13: Existing Water Rates...21 Table 14: Existing Sewer Rates...21 Table 15: Water Rate Forecast...23 Table 16: Sewer Rate Forecast...23 Table 17: Residential Customer Impacts...24 Table 18: Commercial Customer Impacts...24 Utility Rate Study Report iii

5 1. INTRODUCTION Raftelis Financial Consultants, Inc. (RFC) was engaged by York County, South Carolina (County) to perform a Water and Sewer Financial Planning and Rate Study (Study). This report provides a summary of the results and findings of the Study and provides a recommendation for rate adjustments to address the County s financial objectives. BACKGROUND OF THE UTILITIES The County has experienced significant growth and development in recent years. In 2010, the County s population was 226,073, and the population is expected to grow to 273,000 by As a result of this recent growth and development, and in preparation for projected growth and related capital investment requirements, the County wanted to evaluate and examine its water and sewer financial plan and pricing structure, to ensure a sustainable financial future for the County s Water and Sewer Department. The County accounts for its water and sewer utility through an Enterprise Fund. Revenue is generated from user charges, capacity fees, and other miscellaneous sources. Water service is provided to approximately 13,000 customers. Potable water is purchased from the County of Rock Hill, South Carolina (County) and distributed through a network of water lines and related infrastructure. Average billable water demand is approximately 4.5 million gallons per day (MGD). The County also provides wholesale water services to several communities. Wastewater service is provided to approximately 10,000 customers. Wastewater is collected through a network infrastructure of collection and conveyance lines and delivered to the County for treatment and disposal. SCOPE OF SERVICES RFC worked closely with the County staff to identify the primary objectives of the Study. During these discussions, the following primary objectives were identified: Conducting a comprehensive water and sewer rate study using industry standard ratemaking benchmarks and principles; Evaluate the revenue sufficiency and cost equity of the County s existing water and sewer rates and make recommendations for improvements; Recommend and maintain sufficient revenues in order to meet operating and capital revenue requirements; and Provide a user-friendly financial planning model designed for continuous use by County staff as a financial planning tool. In November of 2015, RFC held a kick-off meeting with County staff to identify the pricing objectives and financial goals for the County. The key financial goals identified by County staff included: 1) examining customer equity between the two utilities, 2) establishing and forecasting rates for the Utility Rate Study Report 1

6 two utilities that sufficiently recover the costs of providing service and address County pricing objectives, and 3) developing a long-term financial plan for two utilities that address future infrastructure investment requirements. RFC integrated each of these objectives throughout the Study. RFC has developed a Utility Financial Planning and Rate Model (Model) to forecast annual revenue requirements, customer demand, rates, and system revenues over a multi-year planning period. The Model provides a module for analyzing the County s current financial position and the future impacts of the recommended program of rate adjustments on the system and its customers. The Model is included as a deliverable of the Study. 2 York County, South Carolina

7 2. RATE SETTING PROCESS RFC utilized a systematic approach for rate setting designed around a five-step process (Exhibit 1) tailored specifically to the County s goals and objectives. The approach begins with discussions with County staff that provide a foundation for identifying and prioritizing the County s most important objectives for the utility rates. Exhibit 1 Rate Setting Process Step 1: Identify Financial & Pricing Objectives The first step in the rate setting process is the identification of pricing objectives. As previously mentioned, RFC conducted a project kick-off meeting with County staff to identify the County s most important pricing objectives and discuss the related implications of the overall rate setting process. During the meeting, RFC also discussed the advantages and disadvantages of the County s current rate structures as well as rate structure alternatives. The purpose of this discussion was to identify alternative rate structures that were the most applicable to the County s operation, customer characteristics, available data, and that address as many of the County s pricing objectives as possible. During the project kick-off meeting, County Staff indicated that they wanted to keep the majority of the existing rate structure intact. As a result, the main objective in the study was to ensure revenue sufficiency. However, the County did ask RFC to propose rate structure modifications to help simplify the rate structure and look for options to better align revenue recovery with the demand customers place on the system. Utility Rate Study Report 3

8 Step 2: Identify Revenue Requirements, Demand Projections, and Establish a Financial Plan The next step in the rate setting process is identifying revenue requirements for the test year. Revenue requirements include all Operations and Maintenance (O&M) expenses and capital costs incurred by the County to operate the water and sewer utilities. Revenue requirements not only represent the minimum cash needs of the utility, but also the liquidity and debt service coverage requirements. The methodology for determining the County s revenue requirements for the test year are discussed in detail in Section 3.1. A critical element in developing rate recommendations, particularly for the water and sewer utilities, is the projection of customer demand. As will be discussed in Section 3.2, the County s demand and account data for the utility customers was reviewed in detail, and consideration was given to potential implications related to rate design to determine a reasonable forecast of demand for the test year. Step 3: Allocate Costs Once the revenue requirements have been identified, the next step is to allocate costs in a manner consistent with industry standards and practices. The purpose of this step is to determine the cost of serving the utility customers and to evaluate whether or not the current rate structure recovers this cost in an equitable manner. Step 4: Design Rate Structure Once the pricing objectives were identified and after data related to cost and usage characteristics were reviewed, RFC developed preliminary rate recommendations that addressed as many of the objectives as possible. Step 5: Assess Effectiveness of Addressing Pricing Objectives The final step in the rate setting process is to compare the results of each alterative rate structure relative to the pricing objectives and utility goals identified in Step 1. The resulting rates and customer impacts for each alternative were compared to the objectives in order to determine the effectiveness of each rate structure adjustment. 4 York County, South Carolina

9 3. FINANCIAL PLAN The most important element to any rate study, beyond addressing the top pricing objectives, is to ensure that a utility generates revenues that are sufficient for the operation of the system. In order to evaluate whether system revenues are sufficient to cover the forecast of revenue requirements, RFC developed a financial plan. Developing a financial plan includes establishing a forecast of revenue requirements, determining the necessary revenue increases using demand projections, and examining the forecasted operating results. REVENUE REQUIREMENTS The first major objective of the Study is developing an understanding of the utilities revenue requirements over a mult-year forecast period. For the purpose of this study, our forecast period was FY 2017 FY As previously mentioned, revenue requirements are comprised of operating expenses, annual debt service payments, cash-funded capital, and reserve transfers. Operating Expenses Operating expenses represent normal, recurring expenses necessary to operate and maintain the System in good condition incurred during the County s annual accounting cycle, Fiscal Year (FY) ending June 30 th. The FY 2016 and FY 2017 (preliminary) operating budgets were provided to RFC by County staff and served as the baseline for the utilities operating costs. In order to develop a forecast of system operating costs and account for growing utility costs and inflation, cost escalation rates have been developed for all utility operating expenses. Based on discussion with County staff and a review of historical information, salaries and employee benefits have been projected to increase at 3.0% annually for both water and sewer. Insurance costs have been projected to increase at 5.0% annually and commodity related costs have been projected to increase at 4.0% annually. All other operating costs excluding the cost of wholesale water and sewer services were projected to increase 2.5% annually. By far the County s largest budget line items are water and sewer purchase charges from the City. During the course of the Study, the County received feedback from City staff on the projected level of increases in the wholesale unit cost for both the water and sewer utility systems. Specifically, the County anticipates wholesale water costs to increase 12.5% in FY 2017, 11.5% in FY 2018, 11.0% in FY 2019, and 9.0% in FY No additional increases in the wholesale water unit cost are projected for the reminder of the forecast period. The County anticipates wholesale sewer costs to increase 12.5% in FY 2017 and 2.0% annually for the reminder of the forecast period. The net impact of these cost escalation rates amounts to an average annual increase in total operating expenses of 3.9% annually during the forecast period. Budget operating expenses for FY 2016 and projected operating expenses for FY 2017 FY 2025 are shown in Table 1. Utility Rate Study Report 5

10 Table 1: Operating Expenses Budgeted Projected Projected Projected Projected Projected Projected Projected Projected Projected WATER Salary - allocate via accounts $ 602,900 $ 620,987 $ 639,617 $ 658,805 $ 678,570 $ 698,927 $ 719,894 $ 741,491 $ 763,736 $ 786,648 Benefits - allocate via accounts 192, , , , , , , , , ,170 Insurance - split equally 22,500 23,625 24,806 26,047 27,349 28,716 30,152 31,660 33,243 34,905 Utilities - allocate via flow 252, , , , , , , , , ,848 Other - allocate via accounts 804, , , , , , , , ,844 1,004,340 Water Purchase 2,400,000 2,700,000 3,010,500 3,341,655 3,642,404 3,642,404 3,642,404 3,824,524 4,015,750 4,216,538 Subtotal - WATER $ 4,274,227 $ 4,629,404 $ 4,996,759 $ 5,386,500 $ 5,747,621 $ 5,809,836 $ 5,873,951 $ 6,122,148 $ 6,381,474 $ 6,652, % 7.9% 7.8% 6.7% 1.1% 1.1% 4.2% 4.2% 4.2% SEWER Salary - allocate via accounts $ 455,573 $ 469,240 $ 483,317 $ 497,817 $ 512,751 $ 528,134 $ 543,978 $ 560,297 $ 577,106 $ 594,419 Benefits - allocate via accounts 145, , , , , , , , , ,793 Insurance - split equally 22,500 23,625 24,806 26,047 27,349 28,716 30,152 31,660 33,243 34,905 Utilities - allocate via flow 160, , , , , , , , , ,268 Other - allocate via accounts 607, , , , , , , , , ,915 Sewer Purchase 3,000,000 3,375,000 3,442,500 3,511,350 3,581,577 3,653,209 3,726,273 3,912,586 4,108,216 4,313,626 Subtotal - SEWER $ 4,391,596 $ 4,807,359 $ 4,916,856 $ 5,028,976 $ 5,143,784 $ 5,261,351 $ 5,381,748 $ 5,616,834 $ 5,862,723 $ 6,119, % 2.3% 2.3% 2.3% 2.3% 2.3% 4.4% 4.4% 4.4% TOTAL SYSTEM O&M $ 8,665,823 $ 9,436,763 $ 9,913,615 $ 10,415,476 $ 10,891,405 $ 11,071,187 $ 11,255,699 $ 11,738,982 $ 12,244,197 $ 12,772,376 Capital Improvement Plan The County s Capital Improvement Plan (CIP) identifies the anticipated capital expenditures for the water and sewer systems through FY The water CIP includes various storage, pumping, and distribution infrastructure improvements to both reinvest in existing facilities and provide additional capacity to accommodate future demand. The water CIP includes approximately $63.5 million in project costs over the planning period (FY 2017 FY 2025). The sewer CIP includes various pumping and collection infrastructure improvements to both reinvest in existing facilities and provide additional capacity to accommodate future demand. The sewer CIP includes approximately $94.6 million in project costs over the planning period (FY 2017 FY 2025). It should be noted that projected capital costs in FY 2020 and beyond were split evenly between the water and sewer utilities. RFC worked closely with County staff to evaluate different options for financing the capital program. These alternatives included several combinations of debt and equity financing considering various options for the timing and sequencing of future borrowings. It should be noted that both revenue generated annually from rates to fund capital projects, or rate funded capital, and reserves are both considered equity financing. Ultimately, it was determined the most appropriate capital financing plan is based on a combination of debt and equity including use of existing reserves to address nearterm capital needs in FY This approach would allow the County to fund a portion of significant, ongoing sewer projects with cash reserves in FY 2017 while preserving sufficient liquidity to maintain its credit profile to support a revenue bond issuance in FY The revenue bond issuance is designed to fund a portion of project costs in both FY 2018 and FY The capital financing plan assumes additional debt issuances will be necessary in FY 2024 and FY The County s CIP and funding sources and uses are presented in Table 2. 6 York County, South Carolina

11 Table 2: Capital Improvement Plan Projects and Funding Sources Projected Projected Projected Projected Projected Projected Projected Projected Projected Capital Projects Water Projects $ 2,600,000 $ 6,825,000 $ 3,550,000 $ 7,500,000 $ 7,500,000 $ 7,500,000 $ 8,500,000 $ 9,500,000 $ 10,000,000 Sewer Projects 13,221,000 19,400,000 11,500,000 7,500,000 7,500,000 7,500,000 8,500,000 9,500,000 10,000,000 Total Capital Projects $ 15,821,000 $ 26,225,000 $ 15,050,000 $ 15,000,000 $ 15,000,000 $ 15,000,000 $ 17,000,000 $ 19,000,000 $ 20,000,000 Funding Sources Rate Funded Capital $ 5,350,000 $ 8,000,000 $ 6,800,000 $ 8,675,000 $ 9,500,000 $ 9,400,000 $ 9,000,000 $ 8,450,000 $ 8,550,000 Reserves 10,471, ,325,000 5,500,000 5,600,000 8,000, Revenue Bonds - 18,225,000 8,250, ,550,000 11,450,000 Total Funding Sources $ 15,821,000 $ 26,225,000 $ 15,050,000 $ 15,000,000 $ 15,000,000 $ 15,000,000 $ 17,000,000 $ 19,000,000 $ 20,000,000 As seen above in Table 2, funding for water and sewer system projects is expected to be addressed through a combination of rate funded capital, reserves, and revenue bonds. Debt Service Obligations The County s capital structure includes two outstanding debt obligations for its water and sewer Enterprise Fund. These obligations are in the form of revenue bonds. Table 3 summarizes the County s existing debt service over the planning period. Table 3: Existing Debt Service Projected Projected Projected Projected Projected Projected Projected Projected Projected Exsting Debt Service Water $ 1,027,817 $ 1,030,611 $ 1,037,515 $ 1,039,838 $ 1,048,953 $ 512,694 $ 515,397 $ 517,424 $ 517,705 Sewer 797, , , , , , , , ,732 Total Existng Debt Service $ 1,825,388 $ 1,830,350 $ 1,842,613 $ 1,846,738 $ 1,862,925 $ 910,538 $ 915,338 $ 918,938 $ 919,438 As seen in Table 2, the capital financing plan assumes the County will issue revenue bonds in FY 2018 (second half of year) to fund a portion of project costs in both FY 2018 and FY Specifically, the financial plan assumes the County will sell approximately $18.2 million in revenue bonds in FY 2018 and $8.3 million in revenue bonds in FY For the purpose of this forecast, and in order to achieve efficiencies associated with issuance costs, it is assumed these bonds will be sold in aggregate as a combined issuance of $26.5 million, at a rate of 4.5%, a term of 30 years, and one year payment as a debt service reserve. It should be noted the specific structure of the proposed debt offering would be determined at the time of issuance. No additional bond issuances are forecasted until FY 2024 and FY These future issuances assume a rate of 5.0% and a term of 30 years. Table 4 summarizes the County s existing and proposed debt service over the planning period. Utility Rate Study Report 7

12 Table 3: Existing and Proposed Debt Service Projected Projected Projected Projected Projected Projected Projected Projected Projected Exsting Debt Service Water $ 1,027,817 $ 1,030,611 $ 1,037,515 $ 1,039,838 $ 1,048,953 $ 512,694 $ 515,397 $ 517,424 $ 517,705 Sewer 797, , , , , , , , ,732 Total Existng Debt Service $ 1,825,388 $ 1,830,350 $ 1,842,613 $ 1,846,738 $ 1,862,925 $ 910,538 $ 915,338 $ 918,938 $ 919,438 Proposed Debt Service Water $ - $ 227,652 $ 412,674 $ 874,752 $ 874,752 $ 874,752 $ 874,752 $ 874,752 $ 1,217,898 Sewer ,099 1,336, , , , , ,752 Total Proposed Debt Service $ - $ 227,652 $ 1,059,773 $ 2,211,582 $ 1,749,503 $ 1,749,503 $ 1,749,503 $ 1,749,503 $ 2,092,650 Total Debt Service $ 1,825,388 $ 2,058,002 $ 2,902,386 $ 4,058,319 $ 3,612,428 $ 2,660,041 $ 2,664,841 $ 2,668,441 $ 3,012,087 A major objective of this study has been to determine rates and charges that will be sufficient to recover projected revenue requirements over the forecast period. To address concerns related to revenue sufficiency and annual rate adjustments, a forecast of revenue requirements for water and sewer was developed based on the operating expenses and the financing plan to address the CIP as discussed above. Water Revenue Requirements The water revenue requirement forecast incorporates assumptions to account for the effects of inflation, changes in demand, increased operating cost, and increased capital costs. The most significant drivers of the water revenue requirements relate to additional wholesale costs and costs associated with financing the CIP including, in particular, incremental debt service and rate funded capital. Once revenue requirements are developed, other non-rate revenues, such as capacity fees, investment income, and other miscellaneous revenue are used to offset total revenue requirements in order to determine net water revenue requirements to be recovered from user rates and charges. The County s projected water revenue requirements for FY 2017 through FY 2025 are shown in Table 5. 8 York County, South Carolina

13 Table 5: Water System Revenue Requirements Projected Projected Projected Projected Projected Projected Projected Projected Projected Revenue Requirements - WATER O&M Expenses Salary $ 620,987 $ 639,617 $ 658,805 $ 678,570 $ 698,927 $ 719,894 $ 741,491 $ 763,736 $ 786,648 Benefits 198, , , , , , , , ,170 Insurance 23,625 24,806 26,047 27,349 28,716 30,152 31,660 33,243 34,905 Utilities 262, , , , , , , , ,848 Other 824, , , , , , , ,844 1,004,340 Water Purchase 2,700,000 3,010,500 3,341,655 3,642,404 3,642,404 3,642,404 3,824,524 4,015,750 4,216,538 Subtotal O&M Expenses - WATER $ 4,629,404 $ 4,996,759 $ 5,386,500 $ 5,747,621 $ 5,809,836 $ 5,873,951 $ 6,122,148 $ 6,381,474 $ 6,652,449 Capital Expenditures Rate Funded Capital $ 2,600,000 $ 5,100,000 $ 3,550,000 $ 4,875,000 $ 5,400,000 $ 5,350,000 $ 5,150,000 $ 4,900,000 $ 4,900,000 Subtotal Capital Expenditures - WATER $ 2,600,000 $ 5,100,000 $ 3,550,000 $ 4,875,000 $ 5,400,000 $ 5,350,000 $ 5,150,000 $ 4,900,000 $ 4,900,000 Debt Service Existing $ 1,030,611 $ 1,037,515 $ 1,039,838 $ 1,048,953 $ 512,694 $ 515,397 $ 517,424 $ 517,705 $ 514,186 Proposed - 227, , , , , , ,752 1,217,898 Subtotal Debt Service - WATER $ 1,030,611 $ 1,265,168 $ 1,452,512 $ 1,923,704 $ 1,387,446 $ 1,390,149 $ 1,392,176 $ 1,392,457 $ 1,732,084 Total Revenue Requirements - WATER $ 8,260,015 $ 11,361,927 $ 10,389,012 $ 12,546,326 $ 12,597,282 $ 12,614,100 $ 12,664,323 $ 12,673,931 $ 13,284,534 Offsets Other $ (163,177) $ (163,177) $ (163,177) $ (163,177) $ (163,177) $ (163,177) $ (163,177) $ (163,177) $ (163,177) Impact/Capacity Fee (2,031,127) (2,061,594) (2,092,518) (2,123,906) (2,155,764) (2,188,101) (2,220,922) (2,254,236) (2,288,050) Investment Income (38,277) (38,277) (38,277) (38,277) (38,277) (38,277) (38,277) (38,277) (38,277) Gain on Sale of Capital Assets (7,809) (7,809) (7,809) (7,809) (7,809) (7,809) (7,809) (7,809) (7,809) Subtotal Offsets - WATER $ (2,240,390) $ (2,270,856) $ (2,301,780) $ (2,333,168) $ (2,365,027) $ (2,397,363) $ (2,430,185) $ (2,463,499) $ (2,497,312) Net Revenue Requirements - WATER $ 6,019,625 $ 9,091,070 $ 8,087,231 $ 10,213,158 $ 10,232,255 $ 10,216,737 $ 10,234,139 $ 10,210,433 $ 10,787,221 Percent Change 51.0% -11.0% 26.3% 0.2% -0.2% 0.2% -0.2% 5.6% Sewer Revenue Requirements The sewer revenue requirement forecast incorporates assumptions to account for the effects of inflation, increased demand, increased operating costs, and anticipated capital costs. Similar to the water utility, the most significant drivers of the sewer revenue requirements relate to additional wholesale costs and costs associated with financing the CIP including, in particular, incremental debt service and rate funded capital. Once revenue requirements are developed, other non-rate revenues, such as capacity fees, investment income, and other miscellaneous revenue are used to offset total revenue requirements in order to determine net sewer revenue requirements to be recovered from user rates and charges. The County s projected sewer revenue requirements for FY 2017 through FY 2025 are shown in Table 6. Utility Rate Study Report 9

14 Table 6: Sewer System Revenue Requirements Projected Projected Projected Projected Projected Projected Projected Projected Projected Revenue Requirements - SEWER O&M Expenses Salary $ 469,240 $ 483,317 $ 497,817 $ 512,751 $ 528,134 $ 543,978 $ 560,297 $ 577,106 $ 594,419 Benefits 149, , , , , , , , ,793 Insurance 23,625 24,806 26,047 27,349 28,716 30,152 31,660 33,243 34,905 Utilities 166, , , , , , , , ,268 Other 622, , , , , , , , ,915 Water Purchase 3,375,000 3,442,500 3,511,350 3,581,577 3,653,209 3,726,273 3,912,586 4,108,216 4,313,626 Subtotal O&M Expenses - SEWER $ 4,807,359 $ 4,916,856 $ 5,028,976 $ 5,143,784 $ 5,261,351 $ 5,381,748 $ 5,616,834 $ 5,862,723 $ 6,119,927 Capital Expenditures Rate Funded Capital $ 2,750,000 $ 2,900,000 $ 3,250,000 $ 3,800,000 $ 4,100,000 $ 4,050,000 $ 3,850,000 $ 3,550,000 $ 3,650,000 Subtotal Capital Expenditures - SEWER $ 2,750,000 $ 2,900,000 $ 3,250,000 $ 3,800,000 $ 4,100,000 $ 4,050,000 $ 3,850,000 $ 3,550,000 $ 3,650,000 Debt Service Existing $ 799,739 $ 805,097 $ 806,899 $ 813,972 $ 397,843 $ 399,941 $ 401,514 $ 401,732 $ 399,001 Proposed - 647,099 1,336, , , , , ,752 1,217,898 Subtotal Debt Service - SEWER $ 799,739 $ 1,452,196 $ 2,143,729 $ 1,688,724 $ 1,272,595 $ 1,274,692 $ 1,276,265 $ 1,276,484 $ 1,616,899 Total Revenue Requirements - SEWER $ 8,357,099 $ 9,269,053 $ 10,422,705 $ 10,632,508 $ 10,633,946 $ 10,706,440 $ 10,743,099 $ 10,689,207 $ 11,386,826 Offsets Other $ (163,177) $ (163,177) $ (163,177) $ (163,177) $ (163,177) $ (163,177) $ (163,177) $ (163,177) $ (163,177) Impact/Capacity Fee (1,534,792) (1,557,813) (1,581,181) (1,604,898) (1,628,972) (1,653,406) (1,678,208) (1,703,381) (1,728,931) Investment Income (29,702) (29,702) (29,702) (29,702) (29,702) (29,702) (29,702) (29,702) (29,702) Gain on Sale of Capital Assets (7,809) (7,809) (7,809) (7,809) (7,809) (7,809) (7,809) (7,809) (7,809) Subtotal Offsets - SEWER $ (1,735,479) $ (1,758,501) $ (1,781,868) $ (1,805,586) $ (1,829,660) $ (1,854,094) $ (1,878,895) $ (1,904,068) $ (1,929,619) Net Revenue Requirements - SEWER $ 6,621,619 $ 7,510,552 $ 8,640,836 $ 8,826,922 $ 8,804,287 $ 8,852,346 $ 8,864,204 $ 8,785,138 $ 9,457,207 Percent Change 13.4% 15.0% 2.2% -0.3% 0.5% 0.1% -0.9% 7.7% REVENUES The County collects water and sewer revenue from several different sources. Operating revenues consist primarily of revenues from retail rates and charges. Other operating revenues include revenues from investment income and other miscellaneous charges. Non-operating revenues primarily include revenues from capacity fees. Demand for Services In order to calculate an estimate of system user charge revenue, a customer demand forecast must be developed to pair with the utility rates and charges. To do so, RFC reviewed historical demand and customer growth to project demand over the forecast period. As noted previously, the County has experienced an increase in customer account growth, and it expects this trend to continue. Although customer accounts have increased by approximately % annually over the past two years, total water and sewer demand has increased to a lesser degree. Like many water and wastewater utilities across the country, it is likely the County is experiencing changes in customer usage patterns, including, for example, the national trend of declining per capita consumption due to the prevalence and use of high efficiency fixtures, a broader awareness of resource conservation, and other factors. As a result, and through discussion with County staff, it was agreed that RFC would assume a conservative level of growth in accounts of 1.5% annually and billable demand of 1.0% annually. If 10 York County, South Carolina

15 the County experiences higher levels of growth over the planning period, the forecast is designed to be updated on a rolling basis to accommodate these and other types of changes. The following tables, Table 7 and Table 8, show a summary of the projected number of customer accounts and corresponding water and sewer billable flows for the forecast period. Utility Rate Study Report 11

16 Table 7: Projected Customer Accounts Projected Projected Projected Projected Projected Projected Projected Projected Projected Water Accounts Residential Meter Size 3/4" 10,265 10,419 10,575 10,734 10,895 11,058 11,224 11,392 11,563 1" " Subtotal: Residential 10,266 10,420 10,576 10,735 10,896 11,059 11,225 11,393 11,564 Commercial Meter Size 3/4" " /2" " " " " Subtotal: Commercial Wholesale Irrigation Residential 2,098 2,129 2,161 2,193 2,226 2,259 2,293 2,327 2,362 Commercial Meter Size N/A /4" " /2" " Subtotal: Irrigation 2,465 2,500 2,536 2,572 2,609 2,646 2,684 2,723 2,763 Fire Protection Total Water Accounts 13,480 13,680 13,883 14,090 14,299 14,512 14,728 14,948 15,171 % Change 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% Sewer Accounts Residential Meter Size 3/4" 9,670 9,815 9,962 10,111 10,263 10,417 10,573 10,732 10,893 6" Subtotal: Residential 9,671 9,816 9,963 10,112 10,264 10,418 10,574 10,733 10,894 Commercial Meter Size 3/4" " " Subtotal: Commercial Wholesale Total Sewer Accounts 10,187 10,339 10,493 10,650 10,810 10,972 11,136 11,304 11,474 % Change 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 12 York County, South Carolina

17 Table 8: Projected Customer Usage Projected Projected Projected Projected Projected Projected Projected Projected Projected Water - Volumetric (kgal) Residential 568, , , , , , , , ,311 Commercial 250, , , , , , , , ,137 Wholesale 285, , , , , , , , ,741 SC34 319, , , , , , , , ,483 Duke < 1,800 kgal 20,157 20,359 20,563 20,769 20,977 21,187 21,399 21,613 21,829 > 1,800 kgal 4,625 4,671 4,718 4,765 4,813 4,861 4,910 4,959 5,009 Subtotal: Water - Volumetric (kgal) 1,447,565 1,462,040 1,476,661 1,491,428 1,506,343 1,521,407 1,536,622 1,551,989 1,567,510 Irrigation - Volumetric Residential 104, , , , , , , , ,179 Commercial 79,572 80,368 81,172 81,984 82,804 83,632 84,468 85,313 86,166 Subtotal: Irrigation - Volumetric 184, , , , , , , , ,345 Total Water Billable Volume 1,631,655 1,647,971 1,664,452 1,681,097 1,697,909 1,714,889 1,732,039 1,749,360 1,766,855 % Change 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Sewer - Volumetric (kgal) Residential 530, , , , , , , , ,613 Commerical 243, , , , , , , , ,710 Wholesale < 10,675 kgal 130, , , , , , , , ,502 > 10,675 kgal 133, , , , , , , , ,092 Subtotal: Sewer - Volumetric (kgal) 1,037,918 1,048,297 1,058,781 1,069,368 1,080,061 1,090,862 1,101,771 1,112,789 1,123,917 % Change 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% User Charge Revenues Operating revenues are generated primarily from the water and sewer user rates and charges assessed to retail customers. The general customer classes include residential, commercial, irrigation, wholesale, and fire protection. Revenue from each of these customer classes has been forecasted by using projected customer billing data over the study period and by applying the annual projected adjustments to the user rates and charges. Projected customer demand and usage includes billable water and sewer sales and the number of customers within each customer class. Revenues have been estimated for FY 2017 and beyond based on the projected number of customer accounts and usage and the projected rates assumed to be effective July 1 of each fiscal year. Other Operating & Non-Operating Revenues In addition to user charge revenues, the County collects revenue from several other operating sources. This revenue is projected based on FY 2015 actual results with no annual increase over the forecast period. Non-operating revenues consist primarily of investment income, gain on sale of capital assets, and capacity fees. For the purpose of the financial plan, the investment income and gain on sale of capital assets are based on historical actual results and remain flat over the forecast period. Capacity fee Utility Rate Study Report 13

18 revenue is also based on historical actual results and is projected to increase at the rate of demand growth. REVENUE SUFFICIENCY As mentioned previously, the most important element to any rate study is to ensure that a utility generates revenue that is sufficient for the operation of the system. As such, RFC has assumed rate increases for the duration of the forecast period. RFC recommends that the County review these increases annually to ensure they are sufficiently recovering utility costs. Based on the forecast, in order for the County to generate sufficient revenue to meet the projections in the financial plan it should increase water rates across-the-board (base charge and volumetric rates) by 8.5% annually over the next three years (FY 2017 FY 2019). In order for the County to generate sufficient revenue to meet the projection in the financial plan it should increase sewer rates across-the-board (base charge and volumetric rates) by 12.5% annually over the next three years (FY FY 2019). The forecast also indicates that in order to meet projected water and sewer revenue requirements over the remainder of the planning period the County will need to implement more moderate increases of % annually. It should be noted that RFC recommends increases for the next three years. Future rate increases beyond the next three years are for planning purposes only. These rate increases will support increasing wholesale treatment costs and expenditures associated with addressing the capital improvement plan, including the expectation of additional debt service costs. Table 9 presents projected rate increases over the forecast period. Table 9: Projected Rate Increases Fiscal Year Water Base Water Sewer Sewer Base Volumetric Volumetric % 8.5% 12.5% 12.5% % 8.5% 12.5% 12.5% % 8.5% 12.5% 12.5% % 1.25% 1.25% 1.25% % 1.25% 1.25% 1.25% % 1.0% 1.0% 1.0% % 1.0% 1.0% 1.0% % 1.0% 1.0% 1.0% % 1.0% 1.0% 1.0% 14 York County, South Carolina

19 Debt Service Coverage As required per the Rate Covenant in the County s Bond Ordinance, which secures its outstanding revenue bonds, the County must set rates such that net earnings for each fiscal year must equal to at least 120% of annual debt service. In order to issue additional indebtedness on parity with the outstanding revenue bonds, the additional bonds test requires 125% coverage of maximum annual debt service for bonds outstanding (including proposed bonds). Since the capital financing plan assumes the County will issue additional bonds in FY 2018 and beyond, it is necessary to forecast debt service coverage to assess compliance with all applicable covenants. Given the forecast of billing units, recommended and projected rate increases, and forecast of revenue requirements, Table 10 summarizes the utility revenue sufficiency. As will be discussed below in Section 3.4, the financial forecast assumes that County will utilize reserves to fund a significant portion of capital improvements over the planning period. However, in certain years annual cash surplus will be used to replenish reserve balances with a goal of exceeding minimum financial policy targets identified in this Study. The impact of the proposed revenue adjustments on the rate structure and, ultimately, utility customers will be discussed in Section 5.3. Utility Rate Study Report 15

20 Table 10: Revenue Sufficiency Projected Projected Projected Projected Projected Projected Projected Projected Projected Revenue Operating Revenue Water User Charges $ 8,310,385 $ 9,110,878 $ 9,988,714 $ 10,223,426 $ 10,463,477 $ 10,684,795 $ 10,910,697 $ 11,141,131 $ 11,376,331 Sewer User Charges 6,690,896 7,609,912 8,655,060 8,862,708 9,075,296 9,269,843 9,468,357 9,671,669 9,879,116 Other 326, , , , , , , , ,353 Subtotal Operating Revenue $ 15,327,634 $ 17,047,143 $ 18,970,127 $ 19,412,487 $ 19,865,126 $ 20,280,991 $ 20,705,407 $ 21,139,153 $ 21,581,800 Non-Operating Revenue Capacity Fee $ 3,565,919 $ 3,619,408 $ 3,673,699 $ 3,728,804 $ 3,784,736 $ 3,841,507 $ 3,899,130 $ 3,957,617 $ 4,016,981 Investment Income 67,979 67,979 67,979 67,979 67,979 67,979 67,979 67,979 67,979 Gain on Sale 15,618 15,618 15,618 15,618 15,618 15,618 15,618 15,618 15,618 Subtotal Non-Operating Revenue $ 3,649,516 $ 3,703,005 $ 3,757,296 $ 3,812,401 $ 3,868,333 $ 3,925,104 $ 3,982,727 $ 4,041,214 $ 4,100,578 Total Revenue $ 18,977,150 $ 20,750,148 $ 22,727,423 $ 23,224,888 $ 23,733,460 $ 24,206,095 $ 24,688,134 $ 25,180,367 $ 25,682,378 % Change 9.3% 9.5% 2.2% 2.2% 2.0% 2.0% 2.0% 2.0% Revenue Requirements Operating Expenses Water $ 4,629,404 $ 4,996,759 $ 5,386,500 $ 5,747,621 $ 5,809,836 $ 5,873,951 $ 6,122,148 $ 6,381,474 $ 6,652,449 Sewer 4,807,359 4,916,856 5,028,976 5,143,784 5,261,351 5,381,748 5,616,834 5,862,723 6,119,927 Subtotal Operating Expenses $ 9,436,763 $ 9,913,615 $ 10,415,476 $ 10,891,405 $ 11,071,187 $ 11,255,699 $ 11,738,982 $ 12,244,197 $ 12,772,376 Debt Service Water $ 1,030,611 $ 1,265,168 $ 1,452,512 $ 1,923,704 $ 1,387,446 $ 1,390,149 $ 1,392,176 $ 1,392,457 $ 1,732,084 Sewer 799,739 1,452,196 2,143,729 1,688,724 1,272,595 1,274,692 1,276,265 1,276,484 1,616,899 Subtotal Debt Service $ 1,830,350 $ 2,717,364 $ 3,596,241 $ 3,612,428 $ 2,660,041 $ 2,664,841 $ 2,668,441 $ 2,668,941 $ 3,348,984 Rate Funded Capital Water $ 2,600,000 $ 5,100,000 $ 3,550,000 $ 4,875,000 $ 5,400,000 $ 5,350,000 $ 5,150,000 $ 4,900,000 $ 4,900,000 Sewer 2,750,000 2,900,000 3,250,000 3,800,000 4,100,000 4,050,000 3,850,000 3,550,000 3,650,000 Subtotal Rate Funded Capital $ 5,350,000 $ 8,000,000 $ 6,800,000 $ 8,675,000 $ 9,500,000 $ 9,400,000 $ 9,000,000 $ 8,450,000 $ 8,550,000 Total Revenue Requirements $ 16,617,113 $ 20,630,979 $ 20,811,717 $ 23,178,834 $ 23,231,228 $ 23,320,540 $ 23,407,423 $ 23,363,138 $ 24,671,359 % Change 24.2% 0.9% 11.4% 0.2% 0.4% 0.4% -0.2% 5.6% Net Annual Balance $ 2,360,037 $ 119,168 $ 1,915,706 $ 46,054 $ 502,232 $ 885,555 $ 1,280,711 $ 1,817,229 $ 1,011,019 Debt Service Coverage Net Earnings $ 9,540,387 $ 10,836,533 $ 12,311,947 $ 12,333,482 $ 12,662,273 $ 12,950,396 $ 12,949,152 $ 12,936,170 $ 12,910,002 Debt Service $ 1,830,350 $ 2,717,364 $ 3,596,241 $ 3,612,428 $ 2,660,041 $ 2,664,841 $ 2,668,441 $ 2,668,941 $ 3,348,984 Total Debt Service Coverage (1) Total DSC W/out Capacity Fees Additional Bonds Test (2) Maximum Annual Debt Service (3) $ 4,182,160 $ 4,182,160 $ 4,182,160 $ 4,182,160 $ 4,182,160 $ 4,182,160 $ 4,182,160 $ 4,182,160 $ 4,182,160 Additional Bonds Test (1) Per the Rate Covenant in the Bond Ordinance, Net Earnings for each fiscal year must equal to at least 120% of annual debt service. (2) The additional bonds test requires 125% coverage of maximum annual debt service for bonds outstanding (including the proposed bonds). (3) Projected maximum annual debt service represents a conservative calculation that includes projected debt outside of the planning period. The main drivers behind the projected utility revenue increases are to address the rising cost of wholesale water services and address the capital program. As shown in the CIP, the County plans to invest almost $160 million in capital expenditures over the planning period. It will be critical for the 16 York County, South Carolina

21 County to demonstrate strong fiscal solvency to ensure adequate access to capital markets at the lowest possible cost. FUND BALANCES The revenues and expenses related to providing water and services are accounted for within the County s Water and Sewer Enterprise Fund. The County currently maintains a utility operating fund (Operating Fund) to serve as an internal account for reserves generated to support ongoing operation. Operating Fund The Operating Fund includes unrestricted utility cash and equivalents. Contributions to the operating fund come primarily from revenues generated through user rates and charges. As discussed in Section 3.1, the County expects to fund a portion of capital improvements in FY 2017 with cash reserves in the Operating Fund. As a result, the projected balance in the Operating Fund is expected to decrease in the near term. As a component of this Study, and through discussions with County staff, RFC incorporated guidance as it relates to internal policy targets for Water and Sewer Enterprise Fund reserves. Based on the Enterprise Fund s current financial condition and capital funding needs, RFC recommends the County maintain a minimum target in the Operating Fund of 180 days O&M expenses for working capital. As a result, it is projected that the County will continue to supplement its annual capital needs from FY 2020 through FY 2023 with reserves to minimize the need to seek external funding until FY The projected fund balance in the operating fund is shown in Table 11. Table 11: Fund Balances Projected Projected Projected Projected Projected Projected Projected Projected Projected Fund Balance Operating Reserve Beginning Balance $ 35,014,162 $ 26,903,199 $ 27,022,367 $ 28,938,073 $ 22,659,127 $ 17,661,359 $ 12,946,914 $ 6,227,625 $ 8,044,854 Plus: Net Annual Balance 2,360, ,168 1,915,706 46, , ,555 1,280,711 1,817,229 1,011,019 Less: Transfers for Capital Exp. (10,471,000) - - (6,325,000) (5,500,000) (5,600,000) (8,000,000) - - Ending Balance $ 26,903,199 $ 27,022,367 $ 28,938,073 $ 22,659,127 $ 17,661,359 $ 12,946,914 $ 6,227,625 $ 8,044,854 $ 9,055,873 Days O&M Expenses 1, , Utility Rate Study Report 17

22 4. COST ALLOCATIONS The County indicated that it wants to maintain the underlying structure of its current utility rates and make slight modifications to improve equity among utility customers. As a result, RFC s main objective in performing the Study was to ensure utility revenue sufficiency. As a secondary objective, RFC was asked to evaluate opportunities to improve the level of cost equity within the rate structure. Specifically, this involved identifying appropriate categories of costs to be recovered from each component of the rate structure (e.g. base charges and volume charges) and adjusting the current rate structure so the level of fees and charges were set to recover specific categories of cost. Once these allocations were identified, the Model was designed to calculate the water and sewer rates and charges required to recover costs and ensure revenue sufficiency. The cost allocation approach utilized in this Study is consistent with industry pricing standards and practices. The appropriate level of detail required for a cost of service analysis is contingent on utility pricing objectives, system characteristics, and the accuracy and availability of data necessary to support the analysis. Based on discussions with County Staff, as well as consideration for the County s goals and pricing objectives, it was determined that water and sewer revenue requirements be allocated between each utility and by both fixed and variable components. The County s current water and sewer budget does not split budget costs between water and sewer except for wholesale treatment costs. Therefore, the first step in RFC s allocation process was to allocate the operating costs between water and sewer. Aside from wholesale water purchases and sewer treatment costs, which were allocated 100% to their respective utility, all other operating costs were allocated between water and sewer based on either the distribution of accounts, billable flow and revenue (as appropriate) or, in certain cases, costs were split equally. In terms of capital expenditures, through discussions with County staff, RFC allocated existing debt service based on revenue and future debt service and rate funded capital based on projects identified in the CIP. RFC then allocated water and sewer utility costs to the specific rate components: account, meter, and volume. Account costs represent those costs that are uniform for all customers, regardless of meter size, and include costs such as meter reading, billing, collecting, and accounting. Meter costs represent fixed costs associated with meter services (e.g. meter maintenance) and readiness-to-serve utility costs. Readiness-to-serve utility costs recognize that a water and sewer utility must provide capacity 24 hours a day, 7 days a week, and 365 days a year regardless whether one drop of water is consumed or one drop of wastewater is treated. As such, it is reasonable to recover at least a portion of a utility s related costs, which include debt service, in a fixed component. Volume related costs represent all other costs of serving utility customers. 18 York County, South Carolina

23 By allocating these costs to the specific rate components, RFC could then determine the level of revenue to recover through each rate component. Table 12 shows the water and sewer unit rate calculations for a Test Year of FY 2017 using the water and sewer revenue requirements and allocation factors described above. Table 12: Water & Sewer Rate Calculation Description Test Test Description Water Rate Calculation - Base Charge Sewer Rate Calculation - Base Charge Account Costs $ 245,779 Account Costs $ 185,719 Less: Revenue Offsets - Less: Revenue Offsets - Net Account Costs $ 245,779 Net Account Costs $ 185,719 Annual Water Bills 139,354 Annual Sewer Bills 122,244 Calculated Monthly Account Charge $ Calculated Monthly Account Charge $ Proposed Monthly Account Charge $ Proposed Monthly Account Charge $ Meter Costs $ 1,071,574 Meter Costs $ 830,692 Less: Revenue Offsets - Less: Revenue Offsets - Net Meter Costs $ 1,071,574 Net Meter Costs $ 830,692 Annual Equivalent Bills 153,255 Annual Equivalent Bills 137,129 Calculated Monthly Meter Charge $ Calculated Monthly Meter Charge $ Proposed Monthly Meter Charge $ Proposed Monthly Meter Charge $ Proposed Water Base Charge $ 8.77 Proposed Sewer Base Charge $ 7.58 Water Rate Calculation - Volumetric Charge Sewer Rate Calculation - Volumetric Charge Volumetric Costs (1) $ 9,217,662 Volumetric Costs (1) $ 7,340,687 Less: Revenue Offsets (2,240,390) Less: Revenue Offsets (1,735,479) Base Charge Surplus/Deficit (26,692) Base Charge Surplus/Deficit (23,025) Net Volumetric Costs $ 6,950,580 Net Volumetric Costs $ 5,582,182 Annual Equivalent Billable Water Flows 1,468,766 Annual Equivalent Billable Sewer Flows 961,308 Calculated Volumetric Rate (per kgal) $ Calculated Volumetric Rate (per kgal) $ Proposed Volumetric Water Rate (per kgal) $ 4.74 Proposed Volumetric Sewer Rate (per kgal) $ 5.81 (1) Includes additional costs needed to ensure revenue neutrality compared to the existing rate structure. Once the unit costs were determined, the resulting customer rates were calculated. For the base charge, this included applying the AWWA Meter Flow Capacity ratios, which escalate the meter costs by the capacity capability of each meter size. The water volumetric rate is multiplied by the existing customer class differentials to determine the volumetric rates by customer class. The resulting rates and proposed rate adjustments are described in further detail in Section 5. Utility Rate Study Report 19

24 5. PROPOSED RATE ADJUSTMENTS The following sections identify the proposed rate adjustments of the Study. RFC believes these adjustments improve both the cost justification behind the various user rates and charges and the equity among the utility customers, while meeting the increases for revenue sufficiency identified in the financial plan. 5.1 EXISTING RATES The process to develop water rates began with an evaluation of the County s existing rate structure. The Model was used to determine utility revenue requirements, to calculate rate structure adjustments, and to determine customer bill impacts, financial sufficiency and appropriateness of the rate adjustments. The County s customers are currently charged for water and sewer services based on a rate structure with two components: a fixed monthly base charge and a volumetric rate based on the quantity of water consumed. The fixed base charge is assessed based on meter size (increasing charges for increasing meter sizes) and customer class for both water and sewer services. For water, the volumetric component includes separate, uniform rates for residential, commercial, wholesale, and irrigation customers. Similarly, sewer volumetric rates include separate, uniform rates for residential, commercial, and wholesale customers. Tables 13 and Table 14 show the County s existing water and sewer rates, respectively. 20 York County, South Carolina

25 Table 13: Existing Water Rates Water - Volumetric (/kgal) Residential $ 3.80 Commercial 4.33 Wholesale 3.26 Wholesale - SC Duke < 1,800 kgal 1.97 > 1,800 kgal 3.11 Irrigation - Volumetric (/kgal) Residential $ 3.80 Commercial 4.33 Water - Base Charge Residential Meter Size 3/4" $ " Commercial Meter Size 3/4" $ " /2" " " " " " " " Table 14: Existing Sewer Rates Sewer - Volumetric (/kgal) Residential $ 4.52 Commerical 4.98 Wholesale < 10,675 kgal 3.64 > 10,675 kgal 1.94 Sewer - Base Charge Residential Meter Size 3/4" $ " Commercial Meter Size 3/4" $ " " " " Utility Rate Study Report 21

26 5.2 PROPOSED RATE STRUCTURE ADJUSTMENTS During the project kick-off meeting, County staff indicated they wanted to keep the majority of the rate structure intact. Thus, the main objective in the study was to ensure revenue sufficiency. However, the County did ask RFC to propose rate structure modifications to help simplify the rate structure and look for options to better align revenue recovery with the demand customers place on the system. As such, RFC recommends the following adjustments to the County s water and sewer rates. Base Charge One of the main issues with the County s existing rate structure is that it includes class-based fixed charges which are not consistent with industry best practices. As noted in Section 4, a base charge typically includes an account component, which is assessed to all customers regardless of meter size, and a meter component, which is escalated based on meter size. The account component recovers customer service, billing, and related costs that do not vary based on the size of the customer. The meter component recovers debt service associated with providing capacity in the system (readinessto-serve), and a larger meter can place more potential demand on the system. Since the base charge is linked to both the account and meter components, it is not necessary to have an additional customer class distinction. In order to increase the equity among customers and ensure that customers are only paying for the services that they actually receive, RFC recommends that a universal base charge assessed by meter size. RFC recommends the County maintain its current volumetric rate structure. It should be noted the rate forecast assumes the wholesale rates will increase proportionately with the retail rates. Table 15 and Table 16 present the water and sewer rate forecast including proposed modifications to the base charge, respectively. 22 York County, South Carolina

27 Table 15: Water Rate Forecast Proposed Proposed Proposed Projected Projected Projected Projected Projected Projected Water Base Charge Meter Size 3/4" $ 8.77 $ 9.53 $ $ $ $ $ $ $ " $ $ $ $ $ $ $ $ $ /2" $ $ $ $ $ $ $ $ $ " $ $ $ $ $ $ $ $ $ " $ $ $ $ $ $ $ $ $ " $ $ $ $ $ $ $ $ $ " $ $ $ $ $ $ $ $ $ " $ $ $ $ $ $ $ $ $ " $ $ $ $ $ $ $ $ $ " $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, " $ 1, $ 2, $ 2, $ 2, $ 2, $ 2, $ 2, $ 2, $ 2, Water Volumetric Rate (per kgal) Residential $ 4.74 $ 5.15 $ 5.59 $ 5.66 $ 5.74 $ 5.80 $ 5.86 $ 5.92 $ 5.98 Commerical $ 5.40 $ 5.87 $ 6.37 $ 6.45 $ 6.54 $ 6.61 $ 6.68 $ 6.75 $ 6.81 Wholesale $ 4.07 $ 4.42 $ 4.80 $ 4.86 $ 4.92 $ 4.98 $ 5.03 $ 5.08 $ 5.13 Table 16: Sewer Rate Forecast Sewer Base Charge Proposed Proposed Proposed Projected Projected Projected Projected Projected Projected Meter Size 3/4" $ 7.58 $ 8.53 $ 9.61 $ 9.74 $ 9.87 $ 9.97 $ $ $ " $ $ $ $ $ $ $ $ $ /2" $ $ $ $ $ $ $ $ $ " $ $ $ $ $ $ $ $ $ " $ $ $ $ $ $ $ $ $ " $ $ $ $ $ $ $ $ $ " $ $ $ $ $ $ $ $ $ " $ $ $ $ $ $ $ $ $ " $ $ $ $ $ $ $ $ $ " $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, " $ 1, $ 1, $ 2, $ 2, $ 2, $ 2, $ 2, $ 2, $ 2, Sewer Volumetric Rate (per kgal) Residential $ 5.81 $ 6.54 $ 7.36 $ 7.46 $ 7.56 $ 7.64 $ 7.72 $ 7.80 $ 7.88 Commercial $ 6.40 $ 7.21 $ 8.11 $ 8.22 $ 8.33 $ 8.42 $ 8.51 $ 8.59 $ 8.68 Wholesale $ 4.68 $ 5.27 $ 5.93 $ 6.01 $ 6.09 $ 6.15 $ 6.22 $ 6.28 $ CUSTOMER IMPACTS The impacts from the proposed rate structure adjustment at various levels of usage and customer classes are illustrated in Table 17 and Table 18. Utility Rate Study Report 23

28 Table 4: Residential Customer Impacts Residential Customer Actual Proposed Proposed Proposed Projected Projected Projected Projected Projected Projected Meter Size Consumption 3/4" 1,000 $ $ $ $ $ $ $ $ $ $ % Change 4.9% 10.6% 10.6% 1.3% 1.3% 1.1% 1.1% 1.1% 1.1% $ Change $ 1.26 $ 2.85 $ 3.16 $ 0.44 $ 0.45 $ 0.36 $ 0.37 $ 0.38 $ 0.38 Meter Size Consumption 3/4" 4,500 $ $ $ $ $ $ $ $ $ $ % Change 16.6% 10.7% 10.7% 1.3% 1.4% 1.1% 1.1% 1.1% 1.0% $ Change $ 9.07 $ 6.84 $ 7.57 $ 1.04 $ 1.08 $ 0.85 $ 0.86 $ 0.87 $ 0.87 Meter Size Consumption 3/4" 7,500 $ $ $ $ $ $ $ $ $ $ % Change 19.8% 10.7% 10.7% 1.3% 1.4% 1.1% 1.1% 1.1% 1.0% $ Change $ $ $ $ 1.54 $ 1.62 $ 1.27 $ 1.28 $ 1.29 $ 1.29 Table 18: Commercial Customer Impacts Commercial Customer Actual Proposed Proposed Proposed Projected Projected Projected Projected Projected Projected Meter Size Consumption 3/4" 7,500 $ $ $ $ $ $ $ $ $ $ % Change -23.1% 10.8% 10.7% 1.3% 1.4% 1.1% 1.1% 1.0% 1.0% $ Change $ (31.54) $ $ $ 1.69 $ 1.77 $ 1.42 $ 1.43 $ 1.37 $ 1.36 Meter Size Consumption 1" 25,000 $ $ $ $ $ $ $ $ $ $ % Change -4.6% 10.8% 10.7% 1.3% 1.4% 1.1% 1.1% 1.0% 1.0% $ Change $ (15.37) $ $ $ 5.11 $ 5.36 $ 4.30 $ 4.31 $ 4.07 $ 4.07 Meter Size Consumption 2" 75,000 $ 1, $ $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, % Change -11.4% 10.8% 10.7% 1.3% 1.4% 1.1% 1.1% 1.0% 1.0% $ Change $ (125.46) $ $ $ $ $ $ $ $ As seen above, the proposed modifications to the base charge in FY 2017 affect customers differently depending on their level of consumption. For residential customers, lower volume customers will see a lower percentage increase in their monthly bill due to a smaller increase in the base charge compared to the volumetric rate. Conversely, medium and large residential customers will see a higher increase in their monthly bill since they use more water and the impact of the higher increase in the volumetric rate is more pronounced. Most commercial customers will see a decrease in their monthly bill in the first year since all customers would now be assessed the same fixed charge based on meter size. During the course of the Study, the County indicated a desire to address this particular issue since there are many small commercial customers that place similar levels of demand on the system compared to residential customers, but they are assessed a much higher fixed charged due to the current structure. In FY 2018 and beyond, all customers would experience the same percentage increase in their monthly bill. 24 York County, South Carolina

29 APPENDIX A: Rate Study Recommendation Presentation Utility Rate Study Report 25

30 YORK COUNTY WATER AND SEWER Comprehensive Rate Study Recommendations February 2,

31 AGENDA Rate Study Objectives Key Assumptions & Cost Drivers Financial Plan Current Rate Structure Proposed Rate Structure Customer Impacts 2 2

32 RATE STUDY OBJECTIVES 1. To evaluate the existing rate structure 2. To develop a comprehensive financial plan 3. To recommend defensible rates to support the utility 4. To build a financial planning model for use by the utility 3 3

33 KEY ASSUMPTIONS & RATE DRIVERS 4 4

34 KEY ASSUMPTIONS & COST DRIVERS Operations and Maintenance (O&M) cost growth Escalation rates vary by expense type To address inflationary impacts Anticipated wholesale rate increases Water: range from 12.5% to 9.0% annually Sewer: range from 12.5% to 2.0% annually Account growth 1.5% Demand growth 1.0% Capacity fee revenue of approximately $3.5 million Increase at the rate of account growth 5 5

35 CAPITAL COSTS Capital Improvements Plan through FY 2025 Water: $65.2 million Sewer: $97.0 million Financing Alternatives 1. Combination of debt and equity (option 1) 2. Combination of debt and equity (option 2) 3. All equity (reserves and rate funded capital) 6 6

36 CAPITAL FINANCING PLAN DEBT AND EQUITY (OPTION 1) $30,000 Combined CIP Funding Sources $25,000 $20,000 Thousands $15,000 $10,000 $5,000 $ Rate Funded/Reserves Revenue Bonds 7 7

37 CAPITAL FINANCING PLAN DEBT AND EQUITY (OPTION 2) $30,000 Combined CIP Funding Sources $25,000 $20,000 Thousands $15,000 $10,000 $5,000 $ Rate Funded/Reserves Revenue Bonds 8 8

38 CAPITAL FINANCING PLAN NO DEBT $30,000 Combined CIP Funding Sources $25,000 $20,000 Thousands $15,000 $10,000 $5,000 $ Rate Funded/Reserves Revenue Bonds 9 9

39 FINANCIAL PLAN 10 10

40 STUDY FINDINGS Utility is in strong financial position Coverage, reserves, PAYGO funding amounts Benefits from historical growth Significant capital program to address infrastructure investment needs Expect sizeable increases in wholesale rates Implement rate increases to maintain financial position, address capital program needs, and mitigate risks associated with growth 11 11

41 FINANCIAL PLAN DEBT AND EQUITY (OPTION 1) Implement annual, programmatic rate increase over the next ten years Water = 3.5% annually Sewer = 5.75% annually (through FY 2021) 3.50% annually thereafter Use a combination of debt and equity to finance capital program Assumes 30-year debt at approximately 5.0% interest Supplement short-term (next 2 years) capital needs with reserves Maintain strong debt service coverage and adequate liquidity 12 12

42 FINANCIAL PLAN DEBT AND EQUITY (OPTION 1) Thousands $42,000 $37,000 Financial Plan $32,000 $27,000 $22,000 $17,000 $12,000 $7,000 $2, O&M Expenses Existing Debt Service Proposed Debt Services Rate Funded Capital Reserve Funded Capital Revenues Based on Proposed Rates Revenues Based on Current Rates 13 13

43 FINANCIAL PLAN DEBT AND EQUITY (OPTION 1) 6.00 Debt Service Coverage Total Debt Service Coverage Minimum Target Coverage Coverage without Impact Fees 14 14

44 FINANCIAL PLAN DEBT AND EQUITY (OPTION 1) Reserve Balances Thousands $40,000 $35, % 350.0% $30, % $25, % $20, % $15, % $10, % $5, % $ % Operating Reserve Fund Bal. % O&M and Debt 15 15

45 FINANCIAL PLAN DEBT AND EQUITY (OPTION 2) Implement 3-year rate plan Water = 8.5% annually Sewer = 12.5% annually Use a combination of debt and equity to finance capital program Supplement capital needs in FY 2017 with reserves Issue approximately $26.5 million in debt (FY 2018) To address capital needs in both FY 2018 and FY 2019 Preserve liquidity near term to enhance credit Maintain strong debt service coverage 16 16

46 FINANCIAL PLAN DEBT AND EQUITY (OPTION 2) Thousands $37,000 $32,000 Financial Plan $27,000 $22,000 $17,000 $12,000 $7,000 $2, O&M Expenses Existing Debt Service Proposed Debt Services Rate Funded Capital Reserve Funded Capital Revenues Based on Proposed Rates Revenues Based on Current Rates 17 17

47 FINANCIAL PLAN DEBT AND EQUITY (OPTION 2) 6.00 Debt Service Coverage Total Debt Service Coverage Minimum Target Coverage Coverage without Impact Fees 18 18

48 FINANCIAL PLAN DEBT AND EQUITY (OPTION 2) Reserve Balances $40, % $35, % $30, % Thousands $25,000 $20,000 $15, % 200.0% 150.0% $10, % $5, % $ % Operating Reserve Fund Bal. % O&M and Debt 19 19

49 FINANCIAL PLAN NO DEBT Implement one-time rate increase to address capital needs Water = 45% increase Sewer = 80% increase Finance entire capital program internally Present value debt savings of approximately $33 million* Supplement with reserves while preserving adequate liquidity Targets rate funded capital of approximate $15.0 million annually Supplement with reserves if annual capital spending beyond $15.0 million *Assumes 5.0% discount rate

50 FINANCIAL PLAN NO DEBT Thousands $42,000 $37,000 Financial Plan $32,000 $27,000 $22,000 $17,000 $12,000 $7,000 $2, O&M Expenses Existing Debt Service Proposed Debt Services Rate Funded Capital Reserve Funded Capital Revenues Based on Proposed Rates Revenues Based on Current Rates 21 21

51 FINANCIAL PLAN NO DEBT Reserve Balances Thousands $40,000 $35,000 $30, % 350.0% 300.0% $25, % $20, % $15, % $10, % $5, % $ % Operating Reserve Fund Bal. % O&M and Debt 22 22

52 FINANCIAL PLAN NO DEBT Debt Service Coverage Total Debt Service Coverage Minimum Target Coverage Coverage without Impact Fees 23 23

53 CURRENT RATE STRUCTURE 24 24

54 CURRENT RATE STRUCTURE Water - Volumetric (/kgal) Residential $ 3.80 Commercial 4.33 Water - Base Charge Residential Meter Size 3/4" $ " Commercial Meter Size 3/4" $ " /2" " " " " " " " "

55 CURRENT RATE STRUCTURE Sewer - Volumetric (/kgal) Residential $ 4.52 Commerical 4.98 Sewer - Base Charge Residential Meter Size 3/4" $ " Commercial Meter Size 3/4" $ " " " " "

56 PRICING OBJECTIVES Cost of Service Based Allocations Financial Sufficiency Simple to Understand and Update Ease of Implementation Legality Water Efficiency/ Conservation Rate Stability Minimal Customer Impacts Economic Development Revenue Stability Affordability to Disadvantaged Customers Equitable Contributions from New Customers 27 27

57 PREFERRED PRICING OBJECTIVES From Kickoff Meeting Simple to understand and update Ease of implementation Rate stability Revenue stability 28 28

58 CURRENT RATE STRUCTURE PROS CONs CONS No change in rate structure to communicate No additional administrative burden Potential for customer concern Potential for more tailored approach to better align revenue recovery with the demand customers place on the system Class-based fixed charges not consistent with industry best practices 29 29

59 PROPOSED RATE STRUCTURE (DEBT AND EQUITY FINANCIAL PLAN OPTION 2) 30 30

60 OPTIONS FOR CONSIDERATION System service charge (monthly fixed charge) Simplify by eliminating class-based service charges Move to a structure based only on meter size More transparent link to cost causation Account component recovers customer service, billing & collection, and meter reading costs Meter component recovers debt service (readiness-to-serve) Volumetric charges Structure stays the same Recovers all other costs based on usage 31 31

61 PROPOSED RATE STRUCTURE PROS CONs CONS Better alignment with industry best practices Potential to assuage some customer concerns Simple to understand and less administrative burden in the long run Better places the burden of cost recovery on those who place the most demand on the system Will need to communicate new structure to customers More administrative burden in the short run Less revenue stability 32 32

62 PROPOSED RATE STRUCTURE (DEBT/EQUITY FINANCIAL PLAN OPTION 2) Water Service Charge Projected Projected Projected Projected Projected Projected Projected Projected Projected Meter Size 3/4" $ 8.77 $ 9.53 $ $ $ $ $ $ $ " /2" " " " " " " " 1, , , , , , , , , " 1, , , , , , , , ,

63 PROPOSED RATE STRUCTURE (DEBT/EQUITY FINANCIAL PLAN OPTION 2) Sewer Service Charge Projected Projected Projected Projected Projected Projected Projected Projected Projected Meter Size 3/4" $ 7.58 $ 8.53 $ 9.61 $ 9.74 $ 9.87 $ 9.97 $ $ $ " /2" " " " " " " " 1, , , , , , , , , " 1, , , , , , , , , Note: ¾ and 2 water meters have 4 sewer pipe 34 34

64 PROPOSED RATE STRUCTURE (DEBT AND EQUITY FINANCIAL PLAN) Water Volumetric Charge Projected Projected Projected Projected Projected Projected Projected Projected Projected Residential $ 4.74 $ 5.15 $ 5.59 $ 5.66 $ 5.74 $ 5.80 $ 5.86 $ 5.92 $ 5.98 Commerical Sewer Volumetric Charge Projected Projected Projected Projected Projected Projected Projected Projected Projected Residential $ 5.81 $ 6.54 $ 7.36 $ 7.46 $ 7.56 $ 7.64 $ 7.72 $ 7.80 $ 7.88 Commercial $ 6.40 $ 7.21 $ 8.11 $ 8.22 $ 8.33 $ 8.42 $ 8.51 $ 8.59 $

65 CUSTOMER IMPACTS (DEBT AND EQUITY FINANCIAL PLAN OPTION 2) 36 36

66 CUSTOMER IMPACTS CURRENT STRUCTURE Combined Residential Customer Residential Customer Actual Projected Projected Projected Projected Projected Projected Projected Projected Projected Meter Size Consumption 3/4" 1,000 $ $ $ $ $ $ $ $ $ $ % Change 0.0% 10.6% 10.6% 10.6% 1.3% 1.3% 1.0% 1.0% 1.0% 1.0% $ Change $ - $ 2.71 $ 3.00 $ 3.33 $ 0.43 $ 0.44 $ 0.36 $ 0.36 $ 0.36 $ 0.37 Meter Size Consumption 3/4" 4,500 $ $ $ $ $ $ $ $ $ $ % Change 0.0% 10.6% 10.7% 10.7% 1.2% 1.3% 1.0% 1.0% 1.0% 1.0% $ Change $ - $ 5.81 $ 6.45 $ 7.17 $ 0.93 $ 0.94 $ 0.76 $ 0.77 $ 0.78 $ 0.78 Meter Size Consumption 3/4" 7,500 $ $ $ $ $ $ $ $ $ $ % Change 0.0% 10.6% 10.7% 10.7% 1.3% 1.2% 1.0% 1.0% 1.0% 1.0% $ Change $ - $ 8.48 $ 9.41 $ $ 1.35 $ 1.37 $ 1.11 $ 1.12 $ 1.13 $

67 CUSTOMER IMPACTS PROPOSED STRUCTURE Combined Residential Customer Residential Customer Actual Projected Projected Projected Projected Projected Projected Projected Projected Projected Meter Size Consumption 3/4" 1,000 $ $ $ $ $ $ $ $ $ $ % Change 4.9% 10.6% 10.6% 1.3% 1.3% 1.1% 1.1% 1.1% 1.1% $ Change $ 1.26 $ 2.85 $ 3.16 $ 0.44 $ 0.45 $ 0.36 $ 0.37 $ 0.38 $ 0.38 Meter Size Consumption 3/4" 4,500 $ $ $ $ $ $ $ $ $ $ % Change 16.6% 10.7% 10.7% 1.3% 1.4% 1.1% 1.1% 1.1% 1.0% $ Change $ 9.07 $ 6.84 $ 7.57 $ 1.04 $ 1.08 $ 0.85 $ 0.86 $ 0.87 $ 0.87 Meter Size Consumption 3/4" 7,500 $ $ $ $ $ $ $ $ $ $ % Change 19.8% 10.7% 10.7% 1.3% 1.4% 1.1% 1.1% 1.1% 1.0% $ Change $ $ $ $ 1.54 $ 1.62 $ 1.27 $ 1.28 $ 1.29 $

68 CUSTOMER IMPACTS CURRENT STRUCTURE Combined Commercial Customer Commercial Customer Actual Projected Projected Projected Projected Projected Projected Projected Projected Projected Meter Size Consumption 3/4" 7,500 $ $ $ $ $ $ $ $ $ $ % Change 0.0% 10.6% 10.6% 10.6% 1.3% 1.3% 1.0% 1.0% 1.0% 1.0% $ Change $ - $ $ $ $ 2.31 $ 2.34 $ 1.89 $ 1.91 $ 1.93 $ 1.95 Meter Size Consumption 1" 25,000 $ $ $ $ $ $ $ $ $ $ % Change 0.0% 10.4% 10.4% 10.5% 1.3% 1.2% 1.0% 1.0% 1.0% 1.0% $ Change $ - $ $ $ $ 5.60 $ 5.67 $ 4.59 $ 4.64 $ 4.68 $ 4.73 Meter Size Consumption 2" 75,000 $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, % Change 0.0% 10.6% 10.6% 10.7% 1.2% 1.3% 1.0% 1.0% 1.0% 1.0% $ Change $ - $ $ $ $ $ $ $ $ $

69 CUSTOMER IMPACTS PROPOSED STRUCTURE Combined Commercial Customer Commercial Customer Actual Projected Projected Projected Projected Projected Projected Projected Projected Projected Meter Size Consumption 3/4" 7,500 $ $ $ $ $ $ $ $ $ $ % Change -23.1% 10.8% 10.7% 1.3% 1.4% 1.1% 1.1% 1.0% 1.0% $ Change $ (31.54) $ $ $ 1.69 $ 1.77 $ 1.42 $ 1.43 $ 1.37 $ 1.36 Meter Size Consumption 1" 25,000 $ $ $ $ $ $ $ $ $ $ % Change -4.6% 10.8% 10.7% 1.3% 1.4% 1.1% 1.1% 1.0% 1.0% $ Change $ (15.37) $ $ $ 5.11 $ 5.36 $ 4.30 $ 4.31 $ 4.07 $ 4.07 Meter Size Consumption 2" 75,000 $ 1, $ $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, $ 1, % Change -11.4% 10.8% 10.7% 1.3% 1.4% 1.1% 1.1% 1.0% 1.0% $ Change $ (125.46) $ $ $ $ $ $ $ $