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Exhibit A -Scope of Work + O&M Expense + Taxes or Transfer Payments + Annual Depreciation Expense + Return on Rate Base (Investment) = Revenue Requirement + O&M Expense + Taxes or Transfer Payments + Capital Projects Financed with Rate Revenues(? Deptec. Exp.) + Debt Service (P+II = Revenue Requirement The City has stated within their request for proposal that the "cash basis" will be utilized for the revenue requirement analysis. STEP 3 -PREPARE BUDGET PROJECTIONS -This Step Of the prOC05S Wlll develop the lnltial year of costs for use in projecting revenue requirements. To develop the budget projections, HDR will work with the City staff to review prior cost history and cun•ent trends. Specifically, the City has identified the major budget items such as pumping costs, capital costs and personnel as areas of focus. In addition, HDR would also include personnel benefits (medical) as an area that has had. significant cost changes over the last few yeazs. In developing these projections, the impacts of development and customer growth must also be incorporated into the analysis. STEP 4 - PROJECTION OF THE REVENUE REQUIREMENTS - Revenue requirements are composed of two major types of costs; operational and capital expenses. The operational costs for the initial yeaz will have been developed in the previous step. Within this portion of the analysis, the budget projections for FY 2007/08 will be projected for the future years using assumed escalation factors, and adjusted for any known changes in operations in future years (e.g. additional personnel, growth/expansion, etc.) While the projection of the operational costs is fairly straightforward, the capital cost projections aze generally the focus of the analysis, and require more thought and planning. Within Task 1.2, an initial capital plan will have been developed. While this is the starting point for capital costs (expenditures), it must be placed in the context of the potential impacts to rates. This portion of the analysis will determine a capital improvement funding plan for the City. In the financial planning process, consideration must be given to maximizing the capital improvements (expenditures) for the system, while minimizing rates to its customers. This is accomplished in a variety of ways. However, the most important aspect of this discussion is that there are multiple methods of financing capital expenditures, and it is through this process that rates can be minimized. Table 2 provides an overview of the general approach that is used to develop a capital expense plan for the revenue requirement analysis. Comprehensive Local Sewer Rate Study A-4 ~~ Clty of Pleasanton next decision is to determine the basis or method of accumulating costs. There are two choices for acctmulating costs for revenue requiremenbfinancial planning purposes; the "cash" or "utility/accrual" basis. Table 1 provides a simple comparison between these two "generally accepted" methodologies.