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Exhibit A -Scope of Work <br />+ Total Capital Projects - <br />/ Replacement and Refurbishment Capital Projects <br />/ Legally Mandated Capital Projects <br />/ System Growth and Expansion Capital Projects <br />- Outside Funding Sources - <br />/ Capital Reserves <br />/ Grants <br />/ Low-Interest Loans (State and/or Federal) <br />/ Connection Fees/Contributed Capital <br />/ Short-Term Borrowing <br />/ Borrowed Funds/L.one Term Debt (e.~. Revenue Bondl <br />= Capital Projects Financed with Rate Revenues (2 Deprec. Exp.) <br />The basic framework shown above is developed on a yeaz-by-year basis for each of the projected <br />years of the requirement analysis. In summary form, the general approach is to list all sewer <br />capital projects in each yeaz, and then determine the various outside funding sources for each of <br />the projects. These outside funding sources may be low-interest loans, grants, customer capital <br />contributions, impact fees, etc. The balance of projects not funded by the available sources of <br />funds must be financed from a combination of long-term debt and rates. It is the balancing of the <br />use of long-term debt to the impact upon rates, which is critical to the analysis. <br />In balancing the use of debt to equity (rate) financing of capital projects, a number of financial <br />planning aspects are taken into account. First, the utility's debt service coverage ratio is an <br />important financial measure or indication of the utility's ability to repay debt. The strength of the <br />debt service coverage ratio is a direct function of the amount of capital projects that are financed <br />from rate revenues. At a minimum, HDR typically assumes that a utility should fund an amount <br />equal to or greater than the utility's annual depreciation expense for renewal and replacement <br />capital projects. By following this simple financial rule, the utility is not only assured of a strong <br />debt service coverage ratio, but at the same time, it assures that existing plant in service will be <br />maintained at acceptable service levels with the need for minimal long-term debt financing. <br />However, at the same time, by properly funding for this component of the capital projects, it <br />should provide the utility with greater flexibility in its ability to borrow for capital projects. In <br />this particular case, the amount of capital improvement funding from rates will be determined by <br />the City's current financial/rate policy. The following task will be used to ascertain the impacts <br />of any changes in the City's financial/rate setting policies. <br />In summary, given a better understanding of the overall magnitude of the needed capital projects, <br />a final financing plan can be developed which meets the City's goals and objectives, while <br />attempting to minimize rates and costs over time. <br />Expected City Staff Support for Task 1.4: For this task, the City will be expected to <br />^^ Comprehensive Loeal Sewer Rate Study A-5 <br />1 L~ City of Pleasanton <br />