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Task II. Cost of Service Rate Model and Scenario Development Task 11 will be the bulk of our financial analysis, during which we will identify revenue requirements, analyze cost of service, and develop rate design alternatives for the water, recycled water, and sewer systems, as well as evaluate the City's miscellaneous fees, assess service levels, and conduct benchmarking/surveying. Task Il.a - Revenue Requirements We use our revenue sufficiency and financial planning module to develop a 10-year financial management plan for both enterprise funds, including projected annual revenue requirements and rate adjustments. This module allows examination of historical operating expenses, growth and consumption trends, alternative capital Improvement spending levels, debt service coverage ratios, levels of operating and capital reserves, and other financial policies/goals that affect the revenue requirements of the funds. Demand Projections. In addition to evaluating financial goals and objectives, we will also evaluate alternative demand projections, cost escalation factors, changes in usage patterns, elasticity of customer demand in response to rate increases, and other variables that could affect the financial performance of the enterprises, including separately identifying portions of the utility system revenues that fund utility system operating costs. One item of particular importance is the projection of volumetric sales. Water use patterns are influenced by price signals, and change in customer behavior can also be affected by other non -price factors, such as rainfall (as evidenced by the recent drought), conservation programs (as evidenced by reactions to the Governor's drought declaration in 2015), and economic conditions (as evidenced by the recent recession). We will analyze probable ranges of demand changes in response to different degrees of rate increases, weather patterns, rate structure changes, etc. Capital Spending Scenarios. Our tools are particularly adept and showing the rate impact of comparative capital spending scenarios. Our team is equally adept at examining the age and condition of your system to understand whether the currently level of capital spending is sufficient to keep pace with the depreciation of the system's assets. We will work with staff to develop a series of comparative capital spending scenarios that can be presented to stakeholders for consideration. CIP Funding Sources $70M $60M $50M $40M $30M $20M $10M $QM ■ Debt * Operating ■ Capita I tkserve Funding Plan. For all scenarios reviewed, the financial planning module will develop a funding plan, including the identification of the amount, timing, and type of borrowing required as may be necessary (debt scenarios). We will examine each enterprise fund's use of debt financing for capital improvements and assess the impact of current levels of debt financing, as well as building a financing scenario to support the City in maintaining a proper balance for debt coverage and rate stabilization over the study period. City of Santa Ana, California i Water and Sewer Enterprise Cost of Service Study Starlec 8