Carlsborg Sewer Financial Plan February 2014 · Carlsborg system is a new utility Independent of...

Carlsborg Sewer Financial Plan

February 2014

Approximately how much will Carlsborg sewer

customers have to pay each month?

□ Key Assumptions – Costs and Number of Connections

□ Projected rates

□ County subsidy needed

□ Sensitivity analysis – impact of faster or slower growth

How much might it cost to connect?

□ Connection charge

□ Connection policies and incentives

□ Get Connected Loan Program

Outline

Carlsborg system is a new utility

□ Independent of Sequim

□ Eventually independent of the County County subsidies are explicit and limited-term

Carlsborg system must plan ahead for operating

reserves and future capital costs

Connection policies will be designed to encourage

new connections up front

□ Voluntary at first, but not indefinitely

Wholesale agreement with Sequim for treatment

and transmission

Construction year is 2015; initial connection period is

two years from availability

Basic Assumptions

Treatment Operating &Maintenance (O&M) charge

□ Per-gallon rate paid to Sequim, based on the City’s

treatment O&M costs per gallon, minus State tax, plus 1.15

out-of-City multiplier Because City doesn’t have to pay State tax on its revenue from

Carlsborg, there is no need for Carlsborg to pay the City for that tax

If the law is ever changed to make Carlsborg revenue taxable, then it

should be added to the City’s O&M charges

□ Estimated for each year, with after-the-fact “true up” based on actual expenditures and relative flows from each party

□ Current forecast: $.0092 per gallon (just under a penny per

gallon) in 2016

Assumptions – Costs Paid to City

“Pipe charge” for Sequim transmission O&M costs

□ Flat rate paid to Sequim, based on [Estimated Carlsborg % of flows through shared pipe] multiplied by

[Shared pipe lineal feet as % of total collection system lineal feet]

□ The resulting % is multiplied by Sequim costs for collection,

pumping & transmission, minus State tax, plus 1.15 multiplier

□ Estimated for each year, with after-the-fact “true up” based

on actual City expenditures

□ O&M costs include proportionate share of City overhead

□ O&M costs exclude customer billing and meter reading,

because that service is not expected to be provided by the

City

□ Current forecast: Carlsborg share is 1.71% of Sequim

collection system O&M—after markup, $14,000/year in 2016


Initial Capacity Charge

□ One-time “buy-in” payment, based on depreciated value

of treatment capital assets,

□ Estimated $1.7-$2.0 million, paid as part of project cost

Future Capital Cost Share - % share depends on

type of capital:

□ Treatment capital : Based on relative projected flows in 20-year forecast, current estimate 6.3%

□ Capital related to collection system as a whole: Same as

O&M pipe charge, current estimate 1.71%

□ Transmission route: Based on Carlsborg % of flow through

particular segment to be upgraded or replaced—current weighted average is 44.1%


Out-of-City Multiplier

□ Common practice with City owned utilities, can be applied

to both retail and wholesale customers

□ Recognizes risk borne by in-City ratepayers in creating and

managing the system

□ City’s current out-of-City multiplier is 2.0, except where set

at a different level by contract Bell Hill currently pays multiplier of 1.5

All other out-of-City customers of Sequim pay 2.0 times in-City rates

□ We believe that City would support a reduced multiplier for

Carlsborg of 1.15, subject to City Council approval

□ Pending further discussions, forecast assumes that it applies to O&M charge but not to capital cost share or initial capacity charge


City Utility Tax

□ Paid by Sequim’s in-City customers as well as out-of-City

customers

□ Calculated as 8% of gross receipts, which is equivalent to

an 8.8% markup on the sewer bill before the tax

□ When combined with the out-of-City multiplier of 1.15, the

total City markup on O&M costs is 25%.

□ City utility tax does not apply to future capital cost share,

nor to initial capacity charge


Initial project: $14.1 million in 2015 dollars

□ Initial project funding: $14.3 million

□ Actual project costs could be higher (if higher inflation) or

lower (if capacity charge estimate is too high)

Future Capital Costs (in 2013 constant dollars)

□ Sequim Capital Cost Share: Differs by year, ranges from

$5,000 in 2016 to $87,000 in 2019

□ Future Carlsborg system expansion: Assume beginning in

2026 (year 11) at $272,000 per year; two pump stations in

2030 (year 15) $763,000.

Assumptions – Capital Costs

Treatment O&M Cost: $82,000/year assuming 125

gpd average domestic flow

Sequim pipe charge: $14,000/year

Administration and billing: $16,000/year

Collection system and pump station maintenance:

$98,000/year

State taxes (payments to Sequim can be deducted

from gross revenue): $6,000/year

Total O&M: about $216,000/year, of which $82,000 is

variable (depends of customer growth and flows),

while $134,000 is relatively fixed

Assumptions – Operating Costs

Assumptions: County is committed to getting the

Carlsborg system launched, but in the future, it

needs to be self-supporting

Types of subsidies or potential subsidies:

□ Initial construction - debt service on $10 million PWTF loan –

about $513,000 per year

□ Initial construction – shortfall in construction budget, if any –

currently showing a slight surplus

□ 3-year operating subsidy, until number of customers grows

and rate stabilizes – current estimate about $122,000

□ Get Connected loan program for private plumbing costs –

Current assumption is about $600,000 to be repaid over ten years with 3% interest ($3,000 max loan)

Assumptions – County Subsidy

Assumed average Equivalent Residential Unit (ERU)

generates domestic flow of 125 gallons per day

□ Equivalent to winter average metered water consumption

of 5.08 ccfs per month

Existing structures within range of initial sewer lines:

estimate 484 ERUs, of which 78 are residential and

406 are commercial

□ Base Case scenario assumes 75% of those 484 ERUs connect

in first two years, during the Initial Connection Period

□ The remainder connects over next 18 years, by 2035

In addition, assume 2.15% annual growth from new

development

□ 677 total ERUs by 2035

Growth and Flow Assumptions

Financial policies

□ Operating reserve: 45-60 days of operating expenses

□ Rate-funded capital reinvestment: 5% of annual depreciation initially

Beginning in 2021: 10% of annual depreciation



Economic assumptions

□ Inflation – 2.5% CPI, 3.5% construction inflation (ENR)

□ Future debt (if needed) – 4.75%, 20 years

□ Initial $10 million PWTF loan – 20-year payoff, .25%

Other Assumptions

Forecast Results – Monthly Rates

Basic Summary 2016 2017 2018 2019 2020 2025 2035

ERUs

ERU Forecast (Cumulative) 182 363 377 391 405 483 677

Percentage growth in ERUs 99.5% 3.9% 3.7% 3.6% 3.6% 3.4%

County Funds

County Subsidy - Debt Service 513,229 513,229 513,229 513,229 513,229 513,229 -

County Subsidy - Get Connected Loan Program 300,366 300,366 - - - - -

County Subsidy - Capital Project Costs - - - - - - -

County Subsidy - Operating Subsidy 101,814 15,326 4,513 - - - -

Connection Charges

Connection Charge - Existing Structures 500$ 500$ 8,109$ 8,272$ 8,438$ 9,320$ 11,370$

Connection Charge - New Development 7,793$ 7,949$ 8,109$ 8,272$ 8,438$ 9,320$ 11,370$

Monthly Rates

Volume Rate (per ccf winter average) $7.43 6.92$ 6.89$ 6.86$ 6.83$ 6.69$ 6.43$

Monthly Base Charge per ERU $30.24 32.82$ 32.97$ 33.67$ 33.29$ 33.93$ 77.18$

Avg Volume Charge/ERU (125 gpd winter avg) $37.76 35.18$ 35.03$ 34.87$ 34.73$ 34.01$ 32.71$

Total Monthly Charge/ERU (125 gpd winter avg) $68.00 68.00$ 68.00$ 68.54$ 68.01$ 67.94$ 109.89$

Increase/(decrease) in monthly rate 0.0% 0.0% 0.8% -0.8% -0.7% 1.2%

Total Monthly Charge/ERU (constant 2014 dollars) $64.72 $63.14 $61.60 $60.58 $58.65 $51.78 $65.43

Flat Rate for Properties on Wells (@175 gpd) $83.10 $82.07 $82.01 $82.49 $81.91 $81.54 $122.97

Note: 2015 is assumed to be the construction year

Take-home messages:

□ This would not be possible without the County Without debt service subsidy, initial rate would be $142 instead of

$68/month

□ Keeping monthly rates manageable depends on getting existing properties connected as soon as possible

Sensitivity Analysis

Summary - Total Monthly Charge per ERU 2016 2017 2018 2019 2020 2025 2035

Base Case $68.00 $68.00 $68.00 $68.54 $68.01 $67.94 $109.89

% Connected in first two years 75%

Converted ERUs - annual growth 1.61%

New Development - annual growth 2.15%

Slower Growth $87.00 $87.00 $87.00 $86.62 $86.14 $87.96 $178.47




Faster Growth $62.00 $62.00 $62.00 $61.92 $61.10 $60.38 $89.61




Connection Charge

Connection Charge 2015 Calculations Notes

Capital Projects (2013 Dollars) 16,573,895$

Inflation to Convert to 2015 1,180,476$ Adds two years of inflation to escalate to system construction year

Capital Projects (2015 Dollars) 17,754,371$ Initial System Built in Construction Year (2015) plus collection system for UGA

Estimated ERUs 2,324 Estimated ERUs in 40 years

Connection Charge 7,640$ Maximum Connection Charge per ERU in 2015

Connection Charge 2025 Calculations Notes

Existing Cost Basis

Existing Assets (2013 Dollars) 13,094,595$

Inflation to Convert to 2015 932,662.52$

14,027,257$

Plus: 10 Years of Interest

Weighted Interest Rate 1.69% $10M with 0.25% , $4M with 5.30% (1/30/14 Bond Buyer Revenue Bond Index)

Applied to Existing Assets 2,374,614$ Interest on Existing Assets per 35.92.025 (10 Years worth)

Total Existing Cost Basis 16,401,872$

Future Cost Basis

Planned Capital Projects (2025 Dollars) 5,257,461$ Carlsborg capital projects planned but not yet built

Total Cost Basis 21,659,333$

Estimated ERUs 2,324 Estimated ERUs in 40 years

Projected Connection Charge 2025 9,320$

10-Year Average Increase per Year 2.01%

Connection Charge

Connection Charge Schedule

10-Year Average Annual Increase 2.01%

2015 2016 2017 2018 2019

7,640$ 7,793$ 7,949$ 8,109$ 8,272$

2020 2021 2022 2023 2024 2025

8,438$ 8,607$ 8,780$ 8,957$ 9,136$ 9,320$

Projected monthly rate is higher than Sequim

Projected connection charge is lower than Sequim

Rate Comparison

Rate and Connection Charge Comparison 2016 2017 2018

Connection Charge

Carlsborg Projected

Existing Structures 500$ 500$ 8,109$

New Development 7,793$ 7,949$ 8,109$

Sequim

In-City 8,550$ 8,800$ 9,050$

Out-of-City assuming 1.15 multiplier 9,833$ 10,120$ 10,408$

Monthly Sewer Charges per ERU

Carlsborg (assuming 5.08 ccf/month winter avg) $68.00 $68.00 $68.00

Carlsborg (assuming 8 ccf/month winter avg) $89.67 $88.19 $88.10

Sequim In-City

Low Volume SF Res (<8 ccf/mo winter avg) $62.25 $64.74 $67.33

High Volume SF Res (>8 ccf/mo winter avg) $72.23 $75.12 $78.12

Sequim Out-of-City (assuming 1.15 multiplier)

Low Volume SF Res (<8 ccf/mo winter avg) $71.58 $74.45 $77.42

High Volume SF Res (>8 ccf/mo winter avg) $83.06 $86.39 $89.84

Estimate of initial capacity buy-in charge to Sequim

needs to be updated

Need to factor in existing properties with wells

□ Recommend assuming 175 gpd instead of 125 gpd

Potential Revisions to Forecast

Need to balance desire for voluntary connections

with the goal of avoiding extremely high rates

Suggested policy

□ No new septic systems; if existing septic system fails, must

extend the line (if necessary) and connect The property owner(s) who extend a line can enter into developer

reimbursement agreements and receive latecomer fees

Potential hardship exception, if cost of extending line would be over

125% of cost of an approved septic system, and if property owner signs

a nonprotest agreement for a future ULID to extend the line (similar to

EUGA provision)

□ If sewer is <200 feet, must connect within one year unless: It has been less than 20 years since existing septic system has been

constructed or substantially renovated, and the septic system is

designed to remove 50% of nitrates

After the 20-year point, the property must be connected, at then-

prevailing connection charges

Connection Policies

In order to scale up, we need both “carrot and

stick”

The connection policy creates the certainty that

eventually the property will have to be connected

However, there should also be an incentive to

connect for those property owners who have an

option

Recommend connection charge for existing

structures (with septic systems) who connect within

Initial Connection Period of 2 years: $500

Incentives

Incentives

Property Owner Decision-Making - Example

Example:

Based on age of septic system, could wait until 2025.

Cost of side sewer & septic decommissioning is $3,000.

Connection charge up-front is $500.

Connection charge in 2025 would be $8,571.

Assumed average monthly sewer charge is $68.00/month.

Assume inflation for private plumbing costs is 3% per year.

Connection Year: 2015 2025

Cost to Customer

Connection charge 500$ 8,571$

Private plumbing costs 3,000 4,032

Monthly sewer bills for ten years 8,160 -

Total Cost to Customer 11,660$ 12,603$

Savings from connecting in 2015 943$

A way to make it possible for property owners to

connect who are motivated to do so

Private plumbing costs are an especially significant

factor for single-family residential customers

Assumed maximum $3,000 loan for 10 years at 3%

Monthly payment to customer: $28.97 added to

sewer bill

County can opt to offer coordinated bidding and

construction management as well

If 200 properties take advantage of option, up-front

cost to County $600,000; repayments $70,000/year

Get Connected Loan Program

Carlsborg Sewer Financial Plan February 2014 · Carlsborg system is a new utility Independent of...

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