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0Watson. & AssociatesECONOMISTS LTD.

Township of Severn

WaterOntario Regulation 453107

Financial PlanI

u:

Financial Plan # 148-301A

Plaza Three101—2000 Argentia Rd.Mississauga, Ontario

Canada LSN 1V9

Phone: (905) 272-3600

Fax: (905) 272-3602November 17, 2015

e-mail: [email protected]

wwwwatson -econ ca

PIanning for growth

Contents

Page

Introduction.1-11.1 Study Purpose.1-11.2 Background 1-1

1.2.1 Financial Plan Defined 1-21.2.2 Financial Plan Requirements — New System 1-21.2.3 Financial Plan Requirements— Existing System 1-31.2.4 Financial Plan Requirements—General 1-41.2.5 Public Sector Accounting Board (P.S.A.B.) Requirements 1-4

2. Sustainable Financial Planning 2-12.1 Introduction 2-12.2 Sustainable Water and Sewage Systems Act 2-22.3 Water Opportunities Act, 2010 (Bill 72) 2-22.4 Water and Wastewater Rate Study 2-3

3. Approach 3-13.1 Overview 3-13.2 Conversion Process 3-1

3.2.1 Calculate Tangible Capital Asset Balances 3-13.2.2 Convert Statement of Operations 3-23.2.3 Convert Statement of Financial Position 3-43.2.4 Convert Statement of Cash Flow and Net Financial

Assets/Debt 3-43.2.5 Verification and Note Preparation 3-6

4. Financial Plan 4-i4.1 Introduction 4-14.2 Water Financial Plan 4-1

4.2.1 Statement of Financial Position (Table 4-1) 4-14.2.2 Statement of Operations (Table 4-2) 4-24.2.3 Statement of Change in Net Financial Assets/Debt (Table 4-

3) 4-34.2.4 Statement of Cash Flow (Table 4-4) 4-3

5. Process for Financial Plan Approval and Submission to the Province 5-1

6. Recommendations 6-1

Appendix A —2015 Water and Wastewater Rate Study — Water Summary Tables A-i

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List of Acronyms

O.Reg. Ontario Regulation

P.S.A.B. Public Sector Accounting Board

S.D.W.A. Safe Drinking Water Act

S.W.S.S.A. Sustainable Water and Sewage Systems Act

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1. Introduction

1.1 Study Purpose

Watson & Associates Economists Ltd. (Watson) was retained by the Township ofSevern (the Township) to prepare a water financial plan as part of the five submissionrequirements for the purposes of obtaining a municipal drinking water license as per theSafe Drinking Water Act, 2002. In general, a financial plan requires an in-depthanalysis of capital and operating needs, a review of current and future demand versussupply, and consideration of available funding sources. This detailed financial planningand forecasting in regards to the Townships water systems has already beencompleted and documented by Watson within the “2015 Township of Severn Water andWastewater Rate Study” (2015 Rate Study). The objective of the report provided hereinis to convert the findings of the 2015 Rate Study into the prescribed reportingrequirements for a financial plan as defined by Ontario Regulation 453/07 (O.Reg.453/07).

1.2 Background

The Safe Drinking Water Act (S.D.W.A.) was passed in December, 2002 in order toaddress some of the recommendations made by the Walkedon Inquiry Part II report.One of the main requirements of the Act is the mandatory licensing of municipal waterproviders. Section 31(1) specifically states,

“No person shall,

a) establish a new municipal drinking water system or replace or carryout an alteration to a municipal drinking water system except underthe authority of and in accordance with an approval under this Partor a drinking water works permit; or

b) use or operate a municipal drinking water system that wasestablished before or after this section comes into force exceptunder the authority of and in accordance with an approval underthis Part or municipal drinking water licence.”

In order to become licensed, a municipality must satisfy five key requirements as perSection 44 (1):

1. Obtain a drinking water works permit;2, Acceptance of the operational plan for the system based on the Drinking Water

Quality Management Standard;

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3. Accreditation of the Operating Authority;4. Prepare and provide a financial plan; and5. Obtain permit to take water.

The preparation of a financial plan is a key requirement for licensing and as such, mustbe undertaken by all water providers.

1.2.1 Financial Plan Defined

Section 30 (1) of the S.D.W.A. provides the following definition of financial plans:

“‘financial plans’ means,

a) financial plans that satisfy the requirements of subsection (2), butonly if,

(i) Bill 175 (Sustainable Water and Sewage Systems Act, 2002,introduced on September 23, 2002) receives Royal Assent,and

(ii) sections 3 and 9 of Bill 175 (Sustainable Water and SewageSystems Act, 2002) are in force, or

b) financial plans that satisfy the requirements prescribed by theMinister, in any other case. 2002, c. 32, s. 30 (1 ).“

As of time of writing, the Sustainable Water and Sewage Systems Act, 2002 cited abovehas been repealed (see Section 2.2 of this report); however, the standards that it directsunderpin the specific requirements of s.30 (1) part b as they are outlined in O.Reg.453/07 and which will be examined in detail below.

1.2.2 Financial Plan Requirements — New System

O.Reg. 453/07 provides the following parameters with regard to s.30 (1) part b of theS.D.W.A. for water systems:

• Financial plans must be approved by Council resolution (or governing body)indicating that the drinking water system is financially viable;

• Financial plans must include a statement that the financial impacts have beenconsidered and apply for a minimum six-year period (commencing when thesystem first serves the public);

• Financial plans must include detail regarding proposed or projected financialoperations itemized by total revenues, total expenses, annual surplus/deficit andaccumulated surplus/deficit (i.e. the components of a “Statement of Operations”

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as per the Public Sector Accounting Board (P.S.A.B.) for each year in which thefinancial plans apply;

• Financial plans applicable to two or more solely-owned drinking water systemscan be prepared as if they are for one drinking water system;

• Financial plans are to be made available to the public upon request and at nocharge;

• If a website is maintained, financial plans are to be made available to the publicthrough publication on the Internet at no charge;

• Notice of the availability of the financial plans is to be given to the public; and• Financial plans are to be submitted to the Ministry of Municipal Affairs and

Housing.

1.2.3 Financialpian Requirements — Existing System

O.Reg. 453/07 also provides details with regard to s.30 (1) part b of the S.D.W.A. forexisting water systems. The requirements for existing systems are summarized asfollows:

• Financial plans must be approved by Council resolution (or governing body);• Financial plans must include a statement that the financial impacts have been

considered and apply for a minimum six-year period (commencing in the year oflicence expiry);

• Financial plans must include detail regarding proposed or projected financialoperations itemized by total revenues, total expenses, annual surplus/deficit andaccumulated surplus/deficit (i.e. the components of a “Statement of Operations’as per the P.S.A.B.) for each year in which the financial plans apply;

• Financial plans must present financial position itemized by total financial assets,total liabilities, net debt, non-financial assets, and tangible capital assets (i.e. thecomponents of a “Statement of Financial Position” as per the P.S.A.B.) for eachyear in which the financial plans apply;

• Gross cash receipts/payments itemized by operating transactions, capitaltransactions, investing transactions and financial transactions (i.e. thecomponents of a “Statement of Cash Flow” as per the P.S.A.B.) for each year inwhich the financial plans apply;

• Financial plans applicable to two or more solely-owned drinking water systemscan be prepared as if they are for one drinking water system;

• Financial plans are to be made available to the public upon request and at nocharge;

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• If a website is maintained, financial plans are to be made available to the publicthrough publication on the Internet at no charge;

• Notice of the availability of the financial plans is to be given to the public; and• Financial plans are to be submitted to the Ministry of Municipal Affairs and

Housing.

1.24 FinancialPian Requirements — General

Given that the legislation falls under the S.D.W.A., a financial plan is mandatory forwater systems and encouraged for wastewater systems. The financial plans shall be fora forecast period of at least six years but longer planning horizons are encouraged. Thefinancial plan is to be completed, approved and submitted at the time of licence renewal(i.e. six months prior to licence expiry). Financial plans may be amended and additionalinformation beyond what is prescribed can be included if deemed necessary.

The financial plans must contain, on the front page, the appropriate financial plannumber as set out in Schedule A of the Municipal Drinking Water Licence document.

1.2.5 Public Sector Accounting Board (P. L.A. B.) Requirements

The components of the financial plans indicated by the regulation are consistent withthe requirements for financial statement presentation as set out in section Psi 200 ofthe Chartered Professional Accountants Canada (previously Canadian Institute ofChartered Accountants) Public Sector Accounting Handbook:

“Financial statements should include a Statement of Financial Position, aStatement of Operations, a Statement of Change in Net Debt, and aStatement of Cash Flow.”

Both the Statement of Financial Position and the Statement of Operations were requiredfor financial reporting purposes in pre-2009 reporting years; however, the formatchanged in 2009 to conform to the requirements of PSi200 and PS315O (see Figures1-1 and 1-2). Financial statements are now reported on a full accrual accounting basis,which will continue in future years. The accrual accounting method recognizesrevenues and expenses in the same period as the activities that give rise to themregardless of when they are actually paid for. Since an exchange of cash is notnecessary to report a financial transaction, the accrual method is meant to provide amore accurate picture of financial position. Before 2009, financial results were reportedon a modified cash basis of accounting, whereby revenues and expenses arerecognized when cash is paid or received and only certain accrual-type items such aspayables and receivables are recognized at year-end. The difference between the

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methods is in the timing of when transactions are reported. This timing difference hasimpacted the presentation of the statements in that various accounts have been addedor deleted in order to properly report the transactions.

Moreover, since the 2009 fiscal year, additional information relating to the accountingtreatment of tangible capital assets is included in annual reporting, as indicated by therequirements under section P53150. Pre-2009, the costs to acquire, develop and/orconstruct capital assets were expensed in the year in which they occur. Going forward,tangible capital assets are capitalized so as to create an inventory of the assets ownedand to account for their ability to provide future benefits. The reporting of tangiblecapital assets required further changes to the format of existing financial statements.From a financial planning perspective, this change is significant for water assets as theycan represent a significant portion of the Township’s total assets.

The Statement of Cash Flow and the Statement of Change in Net Financial Assets/Debt(which is a new statement as of 2009) are required statements going forward. TheStatement of Change in Net Financial Assets/Debt reports on whether enough revenuewas generated in a period to cover the expenses in the period and whether sufficientresources have been generated to support current and future activities (see Figure 1-3).The Statement of Cash Flow reports on how activities were financed for a given periodproviding a measure of the changes in cash for that period (see Figure 1-4).

It should be noted that the Statement of Reserves and Reserve Funds and theStatement of Capital, as used by the public sector pre-2009, have been eliminated bythe new reporting format. The balances and transactions that make up these twostatements have been transferred to either the Statement of Operations or theStatement of Financial Position depending on the nature of the account.

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Figure 1-1

Statement of Financial Position

OLD FORMAT (PRE-2009) 2009 AND FUTURE

AssetsFinancial Assets

CashAccounts ReceivableInvestmentsInventory for resaleOther Assets

Total Financial Assets

Non-Financial AssetsInventory of SuppliesPrepaid Expenses

Total Non-Financial Assets

Financial Assets

CashAccounts ReceivableInvestmentsInventory for resaleOther AssetsTotal Financial Assets

LiabilitiesAccounts Payable & Accrued LiabilitiesDebt (Principal only)Other (DC Reserves-Deferred Revenue)Total Liabilities

NET ASSETS

Municipal PositionFund Balances

Current FundCapital FundReserves and Reserve Funds

Amounts to be RecoveredFrom Future RevenuesFrom Reserves & Reserve Funds

LiabilitiesAccounts Payable & Accrued LiabilitiesDebt (Principal only)Other (DC Reserves-Deferred Revenue)Total Liabilities

NET FINANCIAL ASSETSI(DEBT)

Non-Financial AssetsTangible Capital AssetsInventory of SuppliesPrepaid ExpensesTotal Non-Financial Assets

ACCUMULATED SURPLUSI(DEFICIT)TOTAL MUNICIPAL POSITION

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Figure 1-2

Statement of Operations

OLD FORMAT (PRE-2009) 2009 AND FUTURE

Revenues RevenueBase Charge Revenue Base Charge RevenueRate Based Revenue Rate Based RevenueTransfers from Reserves Earned DC RevenueOther Revenue Other Revenue

Total Revenues Total Revenue

Expenditures ExpensesOperating Expenses

Operating Expenses Interest on DebtAmortization

Capital Other

Total Expenditures Total Expenses

Net Revenues for the year Annual Surplus/(Deficit)Increase (decrease) in amounts to be recovered Accum. Surplusl(Deficit), beg. of yearChange in fund balances Accum. Surplusl(Deficit), end of year

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Figure 1-3Statement of Change in Net Financial AssetslDebt

2009 AND FUTURE

Annual Surplus/(Deflcit)Less: Acquisition of tangible capital assetsAdd: Amortization of tangible capital assets(Gain)/Loss on disposal of tangible capital assetsAdd: Proceeds on sale of tangible capital assetsAdd: Write-downs of tangible capital assetsSub-total

Less: Acquisition of supplies inventoryLess: Acquisition of prepaid expensesAdd: Consumption of supplies inventoryAdd: Use of prepaid expensesSub-total

Net financial assets((net debt), beginning of yearNet financial assets!(net debt), end of year

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Figure 14Statement of Cash Flow1

DIRECT METHOD INDIRECT METHOD

Qperating Transactions Operating TransactionsCash received from: Annual Surplts/(Delicit)

Water Operations Add: Amortization of Tangible Capital AssetsLess: Cash paid for: Lossl(Gain) on sale of Tangible Capital Assets

Operating expenses Decreasef(lncrease) in Accounts ReceivableFinance charges lncrease/(Decrease) in Accounts Payable

Decreasef(lncrease) in Inventories for saleOther items

Cash provided by operating transactions Cash provided by operating transactions

Capital Transactions Capltai TransactionsProceeds on sale of tang,le capital assets Proceeds on sale of tangible capital assetsLess: Cash used to acquire tarctle capital assets Less: Cash used to acquire tangible capital assetsCash applied to capital transactions Cash appiled to capital transactions

investino Transactions investing TransactionsProceeds from bwestments Proceeds from investmentsLess: Cash used to acquire investments Less: Cash used to acquire investmentsCash provided by (applied to) investing transactions Cash provided by (applied to) investing transactIons

Financing Transactions Financing TransactionsProceeds from debt issue Proceeds from debt issueLess: Debt repayment (Principal only) Less: Debt repayment (Principal only)Cash applied to financing transactIons Cash applied to financing transactions

increase in cash and cash equivalents Increase In cash and cash equivalentsCash and cash egulvaients, beginning of year Cash and cash equivalents. beginning of yearCash and cash egulvaients, end of year Cash and cash equivalents, end of year

1 The statement of Cash flow can be prepared using either the direct or indirectmethods. The indirect method derives cash flow by making adjustments to the netsurplus/deficit reported on the statement of operations. The direct method calculatescash flow identifying the direct sources and uses of cash.

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2. Sustainable Financial Planning

2.1 Introduction

In general, sustainability refers to the ability to maintain a certain position over time.While the S.D.W.A. requires a declaration of the financial plan’s sustainability, it doesnot give a clear definition of what would be considered sustainable. Instead, theMinistry of the Environment released a guideline (“Towards Financially SustainableDrinking-Water and Wastewater Systems”) that provides possible approaches toachieving sustainability. The Province’s Principles of Financially Sustainable Water andWastewater Services are provided below:

Principle #1: Ongoing public engagement and transparency can build support for, andconfidence in, financial plans and the system(s) to which they relate.

Principle #2: An integrated approach to planning among water, wastewater, and stormwater systems is desirable given the inherent relationship among theseservices.

Principle #3: Revenues collected for the provision of water and wastewater servicesshould ultimately be used to meet the needs of those services.

Principle #4: Lifecycle planning with mid-course corrections is preferable to planningover the short term, or not planning at all.

Principle #5: An asset management plan is a key input to the development of a financialplan.

Principle #6: A sustainable level of revenue allows for reliable service that meets orexceeds environmental protection standards, while providing sufficientresources for future rehabilitation and replacement needs.

Principle #7: Ensuring users pay for the services they are provided leads to equitableoutcomes and can improve conservation. In general, metering and theuse of rates can help ensure users pay for services received.

Principle #8: Financial plans are “living” documents that require continuousimprovement. Comparing the accuracy of financial projections with actualresults can lead to improved planning in the future.

Principle #9: Financial plans benefit from the close collaboration of various groups,including engineers, accountants, auditors, utility staff and municipalCouncil.

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2.2 Sustainable Water and Sewage Systems Act

The Sustainable Water and Sewage Systems Act (S.W.S.S.A.) was passed onDecember 13, 2002. The intent of the Act was to introduce the requirement formunicipalities to undertake an assessment of the “full cost” of providing their water andthe wastewater services. In total, there were 40 areas within the Act to which theMinister could have made regulations. It is noted that, the regulations, whichaccompany the Act, were not issued and the Act was repealed on December31, 2012.

2.3 Water Opportunities Act, 2010 (Bill 72)

Since the passage of the Safe Drinking Water Act, changes and refinements to thelegislation have been introduced, including Bill 72. Bill 72 was introduced intolegislation on May 18, 2010 and received Royal Assent on November 29, 2010 as theWater Opportunities Act.

The purposes of the Water Opportunities Act are to foster innovative water, wastewaterand storm water technologies, services and practices; to create opportunities foreconomic development and clean-technology jobs; and to conserve and sustain waterresources. To achieve this, Bill 72 provides for the creation of performance targets(financial, operational and maintenance related) which will vary by service type andlocation, and the required submission of conservation and sustainability plans for water,wastewater and storm water.

The sustainability plan in Bill 72 expands on interim legislation for financial plansincluded in O.Reg 453/07, to include the following:

• an asset management plan for the physical infrastructure;• financial plan;

• water conservation plan (for water service only);• a risk assessment;

• a strategy for maintaining and improving the services; and• additional information considered advisable.

Where a Board has jurisdiction over a service, the plan (and any plan amendments)must be approved by the municipality in which the municipal service is provided, beforesubmission to the Minister. The Minister may also direct preparation of joint or partiallyjoint plans.

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Regulations (still forthcoming) will prescribe details with regard to any time periods ortime limits, contents of the plans, identifying which portions of the plan will requirecertification, the public consultation process (if required), limitations updates andrefinements.

2.4 Water and Wastewater Rate Study

As noted above, Watson has already completed extensive financial planning asdocumented in the 2015 Rate Study conducted on behalf of the Township. The studyprocess was designed to address full cost principles and reflect the guiding principlestoward sustainable financial planning. Figure 2-1 below summarizes the process.

Figure 2-1Water and Wastewater Rate Calculation Process

As a result of employing this process, the 2015 Rate Study provides a sound financialplan for the Township’s water systems by providing:

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• A detailed assessment of current and future capital needs including an analysisof potential funding sources;

• An analysis of fixed and variable operating costs in order to determine how theywill be impacted by evolving infrastructure needs and system growth;

• A review and recommendation on rate structures that ensure revenues areequitable and sufficient to meet system needs; and

• A public process that involves ongoing consultation with the main stakeholdersincluding the Township staff, Council, the general public (specifically the users ofthe system) and others, with the aim of gaining input and collaboration on thesustainability of the financial plan.

The details of the financial plan arising from the 2015 Rate Study are contained inAppendix A.

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3. Approach

3.1 Overview

The 2015 Rate Study has been prepared on a modified cash basis; therefore, aconversion was required in order to present a full accrual financial plan for the purposesof this report. The conversion process used will help to establish the structure of thefinancial plan along with the opening balances that will underpin the forecast. Thischapter outlines the conversion process utilized and summarizes the adjustments madeto prepare the financial plan.

3.2 Conversion Process

The conversion from the existing modified cash basis financial plan to the full accrualreporting format required under O.Reg. 453/07 can be summarized in the followingsteps:

1. Calculate Tangible Capital Asset Balances;2. Convert Statement of Operations;3. Convert Statement of Financial Position;4. Convert Statement of Cash Flow and Net Assets/Debt; and5. Verification and Note Preparation.

3.21 Calculate Tangible CapitalAsset Balances

In calculating tangible capital asset balances, existing and future purchased, developed,and/or contributed assets will need to be considered. For existing water assets, aninventory has already been compiled and summarized within the 2015 Rate Study aswell as part of the Township’s annual P.S.A.B. 3150 compliance processes. Given theprospective nature of the 2015 Rate Study, replacement cost is provided for each asset;however, historical cost (which is the original cost to purchase, develop or constructeach asset) is required for financial reporting purposes. Once historical cost isestablished, the following calculations are made to determine net book value:

• Accumulated amortization up to the year prior to the first forecast year;• Amortization expense on existing assets for each year of the forecast period;• Acquisition of new assets for each year of the forecast period; and

• Disposals and related gains or losses for each year of the forecast period.

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Future water capital needs have also been determined and summarized within the 2015Rate Study. These estimates, however, only represent future assets that the Townshipanticipates purchasing or constructing without consideration for assets that arecontributed by developers and other parties (at no cost or partial cost to the Township).These contributed assets could form a significant part of the infrastructure going forwardin terms of the sustainability of the system as a whole and despite their non-monetarynature; the financial plan may need to be adjusted in order to properly account for thesetransactions. Once the sequence and total asset acquisition has been determined forthe forecast period, annual amortization of these assets for each year is calculated in asimilar manner as that used for existing assets.

Once the historical cost, accumulated amortization and amortization expenses arecalculated as described above, the total net book value of the tangible capital assetscan be determined and recorded on the Statement of Financial Position.

3.2.2 Convert Statement of Operations

As per subsection 1.2.5 above, the new Statement of Operations eliminates and/or addscertain transactions that have been reported differently by municipalities since 2009(see Figure 3-1). A wide range of adjustments will be considered and will depend onthe size and complexity of the system. For example, the revenues and expensesassociated with the now obsolete Statement of Capital and Statement of Reserves andReserve Funds (see subsection 1.2.5) will need to be adjusted for and included withinthe Statement of Operations. This includes all non-tangible capital asset costspreviously included in the capital statement (i.e. expenses related to various studies)while at the same time eliminating all expenditures incurred to acquire tangible capitalassets which will now form part of the tangible capital asset balance discussed insubsection 3.2.1. Transfers to and from reserves are no longer explicitly reported on theStatement of Operations. Instead, these transactions are represented by changes incash and accumulated surplus. Also, debt repayment costs relating to the principalpayment portion only need to be removed, as they no longer qualify as an expense forreporting purposes. Principal payments will now be reported as a decrease in debtliability on the Statement of Financial Position. Finally, expenses relating to tangiblecapital assets, such as amortization, wñte-offs and (gain)Iloss on disposal of assets, willbe reported on the Statement of Operations in order to capture the allocation of the costof these assets to operating activities over their useful lives.

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3.23 Convert Statement ofFinancial Position

Once the Statement of Operations has been converted and the net book value oftangible capital assets has been recorded, balances for the remaining items on theStatement of Financial Position are determined and recorded (see Figure 3-2). Asnoted earlier, the applicable balances from the Statement of Capital and the Statementof Reserve and Reserve Funds will need to be transferred to this statement. Theopening/actual balances for the remaining accounts, such as accounts receivable,inventory, accounts payable and outstanding debt (principal only), are recorded andclassified according to the structure of the Statement of Financial Position as outlined inPS 1200.

It is acknowledged that some of the balances required on the Statement of FinancialPosition will be consolidated across the Township and, as such, will be difficult to isolatethe information that is relevant to water. An example of this is accounts receivablewhich may be administered centrally by the Finance Department. Ontario Regulation453/07 allows for the exclusion of these numbers if they are not known at the time ofpreparing the financial plan. Please refer to the Financial Plan Notes in Chapter 4 formore details.

3.2.4 Convert Statement of Cash Flow and Net Financial Assets/Debt

The Statement of Cash Flow summarizes how the Township financed its activities or, inother words, how the costs of providing services were recovered. The statement isderived using comparative Statement of Financial Position, the current Statement ofOperations and other available transaction data.

The Statement of Change in Net Financial Assets/Debt is a new statement whichreconciles the difference between the surplus or deficit from current operations and thechange in net financial assets/debt for the year. This is significant, as net debt providesan indication of future revenue requirements. In order to complete the Statement of NetFinancial Assets/Debt, additional information regarding any gains/losses on disposals ofassets, asset write-downs, acquisition/use of supplies inventory and the acquisition useof prepaid expenses, is necessary (if applicable). Although the Statement of Change inNet Financial Assets/Debt is not required under O.Reg. 453/07, it has been included inthis report as a further indicator of financial viability.

Watson & Associates Economists Ltd. H:Severn2O14 W&VvW Rate Study and 0. Reg0RegSevern OReg ReportFinal. docx

Pag

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3.25 Verification and Note Preparation

The final step in the conversion process is to ensure that all of the statements createdby the previous steps are in balance. The Statement of Financial Position summarizesthe resources and obligations of the Township at a set point in time. The Statement ofOperations summarizes how these resources and obligations changed over thereporting period. To this end, the accumulated surplus/deficit reported on the Statementof Financial Position should equal the accumulated surplus/deficit reported on theStatement of Operations.

The Statement of Change in Net Financial Assets/Debt and the Statement of FinancialPosition are also linked in terms of reporting on net financial assets/debt. On theStatement of Financial Position, net financial assets/debt is equal to the differencebetween financial assets and liabilities and should equal net financial assets/debt ascalculated on the Statement of Net Financial Assets/Debt.

While not part of the financial plan, the accompanying notes are important to summarizethe assumptions and estimates made in preparing the financial plan. Some of thesignificant assumptions that need to be addressed within the financial plan are asfollows:

a) Opening cash balances — Opening cash balances are necessary to complete theStatement of Cash Flows and balance the Statement of Financial Position.Preferably, opening cash balances should be derived from actual informationcontained within the Township’s ledgers. It may not be possible, however, toextract this information from the ledgers for water alone; therefore, a reasonableproxy will be needed. One approach is to assume that opening cash balancesequal ending reserve and reserve fund balances from the previous year adjustedfor accrual-based transactions reflected by accounts receivable/payablebalances. The following equation ouflines this approach:

Ending Reserve/Reserve Fund Balance

Plus: Ending Accounts Payable Balance

Less: Ending Accounts Receivable Balance

Equals: Approximate Ending Cash Balance

b) Amortization Expense — The method and timing of amortization should be basedon the Township’s amortization policy. Otherwise, an assumption will need to bemade and applied consistently throughout the financial plan.

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7

c) Accumulated Amortization — Will be based on the culmination of accumulatedamortization expenses throughout the life of each asset however derived, alongwith information on construction/acquisition date and useful life obtained from the2015 Rate Study.

d) Contributed Assets — As noted earlier, contributed assets could represent asignificant part of the Township’s infrastructure acquisitions. As such, areasonable estimate of value and timing of acquisition/donation may be requiredin order to adequately capture these assets. In the case where contributedassets are deemed to be insignificant or unknown, an assumption of”nocontributed assets within the forecast period” will be made.

e) Accumulated Surplus — The magnitude of the surplus in this area may precipitatethe need for additional explanation especially in the first year of reporting. ThisAccumulated Surplus captures the historical infrastructure investment which hasnot been reported in the past but has accumulated to significant levels. It alsoincludes all water reserve and reserve fund balances.

f) Other Revenues — Will represent the recognition of revenues previously deferred(i.e. development charge revenues) and/or accrued revenues (developercontributions) and/or other minor miscellaneous revenues.

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4. Financial Plan

4.1 Introduction

The following tables provide the complete financial plan for the Townships watersystems. A brief description and analysis of each table is provided below. It isimportant to note that the financial plan that follows is a forward look at the financialposition of the Township’s water systems. It is not an audited document1 and containsvarious estimates as detailed in the “Notes to the Financial Plan” section below.

4.2 Water Financial Plan

4.21 Statement ofFinancial Position (Table 4-1)

The Statement of Financial Position provides information that describes the assets,liabilities, and accumulated surplus of the Township’s water systems. The firstimportant indicator is net financial assets/(debt), which is defined as the differencebetween financial assets and liabilities. This indicator provides an estimation of thesystem’s “future revenue requirement.” A net financial asset position is where financialassets are greater than liabilities and implies that the system has the resources tofinance future operations. Conversely, a net debt position implies that the futurerevenues generated by the system will be needed to finance past transactions as wellas future operations. Table 4-1 indicates that at the end of 2015, the Township’s watersystems will be in a net financial asset position of approximately $430,000. From 2016to 2023, the financial plan forecasts a generally improving net financial positionachieving just over $1.3 million in 2023. However, net financial assets are projected todecrease to just under $930,000 in 2024. This is due to the use of significantreserve/reserve fund amounts, as well as some anticipated debt, to pay for anticipatedcapital projects in that year.

Another important indicator on the Statement of Financial Position is the tangible capitalasset balance. As noted earlier, providing this information is a requirement formunicipalities as part of PS3150 compliance and is significant from a financial planningperspective for the following reasons:

Tangible capital assets such as water mains are imperative to water servicedelivery;

1 O.Reg. 453/07 does not require an audited financial plan.

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• These assets represent significant economic resources in terms of their historicaland replacement costs; therefore, ongoing capital asset management is essentialto managing significant replacements and repairs; and

• The annual maintenance required by these assets has an enduring impact onwater operational budgets.

In general terms, an increase in the tangible capital asset balance indicates that assetsmay have been acquired either through purchase by the Township or donation!contribution by a third party. A decrease in the tangible capital asset balance canindicate a disposal, write down, or use of assets. A use of assets is usually representedby an increase in accumulated amortization due to annual amortization expensesarising as a result of allocating the cost of the asset to operations over the asset’s usefullife. Table 4-1 shows tangible capital assets are expected to decrease by approximately$2.3 million over the forecast period. This indicates that the Township’s projectedamortization and asset disposals are expected to be higher than the plannedinvestments in tangible capital assets over the forecast period.

4.2.2 Statement of Operations (Table 4-2)

The Statement of Operations summarizes the revenues and expenses generated by thewater systems for a given period. The annual surplus/deficit measures whether therevenues generated were sufficient to cover the expenses incurred and, in turn, whethernet financial assets have been maintained or depleted. Table 4-2 illustrates the ratio ofexpenses to revenues, improving from 118% in 2015 to 104% in 2024. As a result,annual deficit decreases from just under $300,000 in 2015 to just under $80,000 by2024. It is important to note that an annual surplus is beneficial to ensure funding isavailable to non-expense costs such as tangible capital asset acquisitions, reserve!reserve fund transfers and debt principal payments.

Another important indicator on this statement is accumulated surplus/deficit. Anaccumulated surplus indicates that the available net resources are sufficient to providefuture water services. An accumulated deficit indicates that resources are insufficient toprovide future services and that borrowing or rate increases are required to financeannual deficits. From Table 4-2, the financial plan indicates that accumulated surplus isprojected to decrease by approximately $1.9 million over the forecast period from a2014 accumulated surplus of approximately $18.5 million. This accumulated surplus, asindicated in Table 4-2, is predominantly made up of reserve and reserve fund balancesas well as historical investments in tangible capital assets.

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3

42.3 Statement of Change in Net Financial Assets/Debt (Table 4-3)

The Statement of Change in Net Financial Assets/Debt indicates whether revenuegenerated was sufficient to cover operating and non-financial asset costs (i.e. inventorysupplies, prepaid expenses, tangible capital assets, etc.) and in so doing, explains thedifference between the annual surplus/deficit and the change in net financial assets/debt for the period. Table 4-3 indicates that in 2015, 2016 and 2024, the forecastedtangible capital asset acquisitions (net of amortization for the year) exceed theforecasted annual surplus/(deficit) resulting in a decrease to net financial assets in eachyear. This is a result of more significant capita) asset acquisitions forecasted in thoseyears. In each of the other years (i.e. 2017 to 2023), forecasted annual surplusexceeds forecasted tangible capital asset acquisitions (net of amortization for the year)resulting in annual increases in net financial assets. This allows for a long-term plan offunding capital through accumulated surplus (i.e. reserves). This is evidenced by theratio of cumulative annual surplus before amortization to cumulative tangible capitalasset acquisitions increasing from Q.48 in 2015 to 1.15 by 2024.1

42.4 Statement of Cash Flow (Table 44)

The Statement of Cash Flow summarizes how water systems are expected to generateand use cash resources during the forecast period. The transactions that provide/usecash are classified as operating, capital, investing and financing activities as shown inTable 4-4. This statement focuses on the cash aspect of these transactions and thus isthe link between cash and accrual based reporting. Table 4-4 indicates that cash fromoperations will be used to fund capital transactions (i.e. tangible capital assetacquisitions), make debt principal payments and build internal reserves and reservefunds over the forecast period. The financial plan projects the Township’s watersystems to be in a deficit cash position at the end of 2015 through to the end of 2019.However, for the remainder of the projection period (i.e. 2020 to 2024) a positive cashposition is projected, improving from just under $97,000 at the end of 2020, to just over$880,000 by 2023, before decreasing to approximately $580,000 by the end of 2024.For further discussions on projected cash balances, please refer to the Notes to theFinancial Plan.

A desirable ratio is 1:1 or better.

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Water

Notes to Financial Plan

The financial plan format, as outlined in Chapter 4, closely approximates the full accrualformat used by municipalities (2009 onward) on their audited financial statements. Thefinancial plan, however, is not an audited document and contains various estimates. Inthis regard, Section 3 (2) of O.Reg. 453/07 states the following:

“Each of the following sub-subparagraphs applies only if the informationreferred to in the sub-subparagraph is known to the owner at the time thefinancial plans are prepared:

1. Sub-subparagraphs 4 i A, B and C of subsection (1)2. Sub-subparagraphs 4 hi A, C, E and F of subsection (1).”

The information referred to in sub-subparagraphs 4 i A, B and C of subsection (1)includes:

A. Total financial assets (i.e. cash and receivables);B. Total liabilities (i.e. payables, debt and deferred revenue); andC. Net debt (i.e. the difference between A and B above).

The information referred to in sub-subparagraphs 4 Hi A, C, E and F of subsection (1)includes:

A. Operating transactions that are cash received from revenues, cash paid foroperating expenses and finance charges;

B. Investing transactions that are acquisitions and disposal of investments;C. Change in cash and cash equivalents during the year; andD. Cash and cash equivalents at the beginning and end of the year.

In order to show a balanced financial plan in a full accrual format for the Township ofSevern, some of the items listed above have been estimated given that the Townshipdoes not maintain all financial asset and liability data separately for water. Usually, thistype of data is combined with the financial assets and liabilities of other departmentsand services given that there is not a current obligation to disclose this data separately(as there is with revenue and expenses). The assumptions used have beendocumented below:

Watson & Associates Economists Ltd. H1Sevorn2O14 W&WW Rate Study and 0.RogORegSevern OReg ReportFina.docx

10

1. Cash, Receivables and Pavables

It is assumed that the opening cash balances required to complete the financialplan are equal to:

Ending Reserve/Reserve Fund Balance

Plus: Ending Accounts Payable Balance

Less: Ending Accounts Receivable Balance

Equals: Approximate Ending Cash Balance

Receivable and payable balances were estimated for each year of the forecastbased on the following factors:

a) Receivables: Based on historical levels of water receivables and accruedreceivables as a percentage of annual water revenues, applied toprojected water revenues (source: Township staff);

b) Payables: Based on historical levels of Township-wide payables as apercentage of Township-wide expenses incurred, applied to projectedwater expenses (source: prior years’ audited financial statements).

2. Debt

Outstanding water related debt at the end of 2014 was $3,153,828. It isanticipated that additional debt proceeds will be required over the forecastperiod. Principal repayments over the forecast period are estimated as follows:

PrincipalYear

Payments

2015 78,5752016 82,7782017 87,2072018 91,8722019 96,7872020 101,9652021 107,4192022 113,1662023 119,2202024 125,598Total $ 1,004,587

Watson & Associates Economists Ltd. H:Severn\2O14 W&WW Rate Study and OReg\OReg\Sevem OReg RopedFinal. docx

11

In situations where landowner contributions offset annual debt payments, a “longterm accounts receivable” was established in Table 4-1 to offset the lang-termdebt obligation.

For financial reporting purposes, debt principal payments represent a decrease indebt liability and the interest payments represent a current year operatingexpense.

3. Deferred Revenue/Accounts Receivable - Other

Deferred revenue is made up of water development charge reserve fundbalances which are considered to be a liability for financial reporting purposesuntil the funds are used to emplace the works for which they have beencollected. In years when the water development charge reserve fund balance isnegative, it is shown as an asset (“accounts receivable — other”) for financialreporting purposes, representing future amounts to be collected from developers.

4. Tangible Capital Assets

Opening net book value of tangible capital assets includes water-relatedassets in the following categories:

i. Infrastructure;

ii. Vehicles;

iU. Equipment;

iv. Land; andv. Facilities.

• Amortization is calculated based on the straight-line approach.• Given the planned asset replacement forecast in the 2015 Rate Study,

useful life on acquisitions is assumed to be equal to typical valuesassigned by the Township for each asset category.

• Write-offs are assumed to equal $0 for each year in the forecast period.• Tangible capital assets are shown on a net basis. It is assumed that

disposals occur when the asset is being replaced, unless the asset isdocumented as a new asset. The value of each asset disposal iscalculated by estimating the original purchase/construction date anddeflating current replacement cost values to those estimated dates inorder to calculate original historical cost.

• Gains/losses on disposals are assumed to be $0 (it is assumed thathistorical cost is equal to accumulated amortization for all disposals).

Watson & Associates Economists Ltd. H:iSevern2O14 W&WW Rate Study and 0.RegOReg\Severn OReg ReportFinaL docx

12

• Residual value is assumed to be $0 for all assets contained within the

forecast period.

• Contributed Assets, as described in subsection 3.2.1, are shown as

Developer Contributions, a revenue, on the Statement of Operations in the

year of contribution, if applicable.

• The Township is unaware of any specific lead service piping in the

Township water systems.

The balance of tangible capital assets is summarized as follows:

Asset Historical Cost 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Opening Tangible Capital Asset Balance 22.668,152 22,943,303 23079.767 23.241,608 23,352,194 23,561,657 23,653,659 23.714.202 23,774,100 23,828204

Acquisitions 304,000 151,000 186,000 188,000 217,000 150.000 95000 flOOD 76.000 761.000Disposals 28649 44.516 24,179 47414 37,337 58.198 34,457 13.102 21,698 59,576

Clo&ng Tangible Capital Asset Balance 22.943,303 23,079,787 22.241,608 23,382,104 23,561.557 23,653.650 23,714,202 23,774,106 23.628,204 24,529.626Opening Accumulated Amortization 4,785,743 5.200.690 5.607,599 6,041.680 6.456,761 6.882,972 7,289,593 7,700,642 8.129.763 8.545091

Amortization Expense 443,796 451.425 458,460 464.315 471.528 454.819 445,506 442,223 437.224 435.428Amortization on Dlssal 28,649 44.516 24,179 47,414 37,337 58,198 34,457 13,102 21,896 59.576

Ending Accumulated AmofllzeUon 5,200,890 5,807,599 6,041,860 6,458.781 6,892.972 7,269,593 7,700,642 8,129,763 8.545,091 8,923,943Net Book Value 17,742.613 17,472,188 17,199,726 18,923.413 16,668,665 15,364,066 16,013.560 15.644,337 15,263,113 15,605,685

5. Accumulated Surplus

Opening accumulated surplus for the forecast period is reconciled as follows:

2015 OpeningWater Accumulated

SurplusReserve Balances

Reseftes: Development charges (658,920)Reseftes: capital/other 584,262

Total Reserves Balance (74,658)Less: Debt Obligations and Deferred Re%enue (2,494,908)Add: Long-term Accounts ReceNble 3.153,828Add: Tangible capital Assets 17,882,409

Total Opening Balance 18,466,671

The accumulated surplus reconciliation for all years within the forecast period iscontained in Table 4-2.

6. Other Revenue

Other revenue includes flat rate revenues, penalties and interest, as well as othernon-operating general revenues.

Watson & Associates Economists Ltd. H:lSevernl2Ol4 W&MV Rate Study and O.RegOReg\Sevem OReg ReportFinal,docx

13

7. Operating Expenses

Capital expenditures for items not meeting the definition of tangible capital assetshave been reclassified as operating expenses and have been expensed in theyear in which they occur.

Watson & Associates Economists Ltd. H;\Sevem2Ol4 W&MA/Rate Study and ORegOReg\Severn OReg ReportFinai.docx

1

5. Process for Financial Plan Approval andSubmission to the Province

As mentioned in Section 1.2, the requirement to prepare the financial plan is provided inSection 32 (5) 2 N of the S.D.W.A. Proof of the preparation of a financial plan is one ofthe submission requirements for municipal drinking water licensing and, uponcompletion, must be submitted to the Ministry of the Environment. As part of O.Reg.453/07, the process established for plan approval, public circulation and filing is set outas follows:

1. The financial plan must be approved by resolution of the municipality who ownsthe drinking water systems or the governing body of the owner. (O.Reg. 453/07,Section 3(1)1)

2. The owner of the drinking water systems must provide notice advertising theavailability of the financial plan. The plans will be made available to the publicupon request and without charge. The plans must also be made available to thepublic on the municipality’s website. (O.Reg. 453/07, Section 3 (1) 5)

3. The owner of the drinking water systems must provide a copy of the financialplan to the Director of Policy Branch, Ministry of Municipal Affairs and Housing.(O.Reg. 453/07, Section 3(1)6)

4. The owner of the drinking water systems must provide proof satisfactory to theMinistry of the Environment that the financial plans for the system satisfy therequirements under the Safe Drinking Water Act. (S.D.W.A. Section 32 (5) 2 ii)

Watson & Associates Economists Ltd. H:ISevern¾2014 W&MA/ Rate Study and O.RegQRegSevern OReg ReportFinaL docx

1

6. Recommendations

This report presents the water financial plan for the Township of Severn in accordancewith the mandatory reporting formats for water systems as detailed in O.Reg. 453/07. Itis important to note that, while mandatory, the financial plan is provided for Council’sinterest and approval; however, for decision making purposes, it may be moreinformative to rely on the information contained within the 2015 Rate Study.Nevertheless, Council is required to pass certain resolutions with regard to this plan andregulations and it is recommended that:

1. The Township of Severn Water Financial Plan prepared by Watson & AssociatesEconomists Ltd. dated November 17, 2015 be approved.

2. Notice of availability of the Financial Plan be advertised.

3. The Financial Plan and the Council Resolution approving the Financial Plan besubmitted to the Ministry of Municipal Affairs and Housing. (O.Reg. 453/07,Section 3(1)6).

4. The Financial Plan and the Council Resolution approving the Financial Plan besubmitted to the Ministry of the Environment, satisfying the requirements under theSafe Drinking Water Act. (S.D.W.A. Section 32 (5) 2 ID).

Watson & Associates Economists Ltd. H:Severn2O14 W&WW Rate Study and O.RegORegSevern OReg ReportFinaL dccx

Page A-i

Appendix A — 2015 Water and WastewaterRate Study — Water Summary Tables

Watson & Associates Economists Ltd. H:Severn2O14 W&WV/ Rate Study and O.Reg\ORegSevern DReg RopedFinaL docx

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