.
A Utility Model for Water and Wastewater
Revised Business Case Summary
March 2016
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Table of Contents
1.
EXECUTIVE SUMMARY ......................................................................................................... 1
2.
BACKGROUND ..................................................................................................................... 2
How Does the Current Utility System Work? ........................................................................... 3
Alignment with City Priorities ................................................................................................ 5
Community Feedback........................................................................................................... 6
Key Clarifications................................................................................................................. 7
3.
2.4.1
Is This a Public-Private Partnership (P3)? ........................................................................ 7
2.4.2
How Will the LUC Impact Utility Rates in the Future? .......................................................10
2.4.3
Did the City Explore Other Options? ..............................................................................12
2.4.4
What Will a New Wastewater Treatment Facility Cost? .....................................................12
2.4.5
Is the City Following its Purchasing Policy? .....................................................................14
THE PARTNERSHIP ............................................................................................................ 15
What Does the City of Lloydminster Bring to the Partnership? ..................................................17
3.1.1
Water and Wastewater Assets ......................................................................................17
3.1.2
Our People .................................................................................................................19
What Does EPCOR Bring to the Partnership? Why EPCOR as a Partner? .....................................20
4.
BUSINESS CASE ANALYSES ............................................................................................... 22
Financial Model Overview ....................................................................................................22
The Utility Corporation Model ...............................................................................................22
Key Assumptions ................................................................................................................25
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Net Value of Water and Wastewater Assets............................................................................31
Base Scenario - Assets into Rate Base ..................................................................................32
Capital Project Funding .......................................................................................................37
Sensitivity Analyses ............................................................................................................38
Viability.............................................................................................................................39
Impact to Overall City Finances ............................................................................................40
5.
NEXT STEPS ...................................................................................................................... 41
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1.
EXECUTIVE SUMMARY
The City has examined the viability of developing
a water and wastewater utility corporation. In
doing so, the City has examined the benefits of
developing a utility corporation in partnership with
EPCOR. This business case is more comprehensive
than the initial business case summary document
shared with Council on February 22nd, 2016.
The intent of the business case and financial
model at this stage is to demonstrate the viability
of setting up a utility corporation. Therefore, the
financial model was developed using a number of
preliminary assumptions and without all the
details required to inform a financial transaction
between the City and EPCOR.
The business case concludes that developing a
utility corporation to provide water and
wastewater services in Lloydminster would:
 Allow a Strategic Partner to invest equity in
the utility corporation and provide support
and experience in developing a utility
corporation; and
 Provide the City with revenue that may be
used to advance other City priorities.
The results presented in the business case are
illustrated using several key assumptions.
Subject to Council approval to proceed with the
development of a utility corporation in partnership
with EPCOR, the City will undertake further due
diligence to facilitate the development of the
detailed financial model, term sheets and
definitive agreements. This process will review
and refine inputs and key assumptions and
develop a detailed financial model to inform the
financial transaction between the City and EPCOR.
 Maintain reasonable water and wastewater
rate growth;
 Provide for funding of future water and
wastewater infrastructure without incurring
additional City debt;
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2.
BACKGROUND
The initial business case summary document presented to City Council on February 22nd, 2016 provided
context regarding the opportunity to create a utility corporation to meet immediate and long-term utility
needs. The primary drivers for the creation of a utility corporation are:
 The City’s need for a new wastewater treatment facility to comply with Saskatchewan Water
Security Agency (WSA) effluent water quality requirements;
 The City’s inability to finance the wastewater treatment facility construction because the debt
incurred would exceed the City’s current borrowing capacity;
 The City’s recent application to the Building Canada Fund not being successful in securing
substantial funding to finance the wastewater treatment facility upgrades; and
 The number of additional major capital projects, beyond the wastewater treatment facility, which
will also need to be completed within the next 10 years.
To address these challenges, the City is considering implementing the Lloydminster Utility Corporation
(LUC).
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www.lloydminster.ca
How Does the Current Utility
System Work?
The City’s existing water and wastewater system
consists of a piped network of distribution and
collection mains, pumping stations, intake and
outfall structures and treatment facilities – all as
notionally shown in Figure 1.
Currently, raw water is drawn from the North
Saskatchewan River within the province of Alberta
and pumped to the City’s water treatment facility
located in Saskatchewan. Water quality is
improved at the water treatment facility to
potable standards and then distributed to the
various residential, industrial and commercial
customers through a network of pressure
watermains.
Wastewater is collected from the same residential,
industrial and commercial customers using a
network of trunk sewer mains, which gravity feed
to the wastewater treatment and lagoon system
in the City’s far northeast area. From there, the
quality of the wastewater (called effluent) is
further improved prior to discharging back into
the North Saskatchewan River in the province of
Saskatchewan.
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The proposed wastewater treatment facility will need to comply with new WSA effluent water quality
requirements, further enhancing the City’s commitment to protecting the environment and specifically, the
North Saskatchewan River which is a valued source of water for several downstream users.
Figure 1: Current Water and Wastewater Utility Systems
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www.lloydminster.ca
Alignment with City Priorities
City Administration believes that creation of the
LUC aligns well with the priorities and plans
created to guide the City well into the future. The
City of Lloydminster continually strives toward
achieving its vision to be “A world class
community with unlimited opportunity.”
Its mission speaks to achieving this vision - to
“provide the highest quality of services
through communication, innovation and
dedication.” This vision and mission provide a
solid foundation from which the City’s Strategic
Plan was created. This Strategic Plan includes
four long-term priorities:
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Strong Relationships;
Vibrant City;
Sustainable Infrastructure; and
Healthy Financial Position.
These priorities serve as a roadmap of where the
City is heading as a community and how it aims
to realize this vision. City Administration believes
that developing a utility corporation for water and
wastewater services is well aligned with, and will
significantly support, these four priorities.
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Here’s how:
Strong Relationships
Through the LUC, the City will build partnerships
that leverage the skills and assets of the City and
combine them with complementary strengths of a
strategic partner who shares its values.
Vibrant City
Ensuring the provision of safe, efficient and
environmentally sensitive water and wastewater
services is critical to ensuring a healthy and
vibrant community.
Sustainable Infrastructure
The development of a utility corporation model
with a strategic partner will provide long-term
utility rate stability along with the capital
financing required to build and sustain water and
wastewater infrastructure well into the future.
Healthy Financial Position
The initial business case study concluded that
developing a utility corporation with a strategic
partner is financially viable and would eliminate
the need to finance water and wastewater related
debt on City accounts which will free up funds for
other City needs.
www.lloydminster.ca
The initial business case notes that the level of
borrowing required for ongoing water and
wastewater investment cannot be funded within
the existing City debt limits, particularly given the
City’s need for other essential capital investments
in the near term. Therefore, developing a utility
corporation to provide water and wastewater
services, a proven service delivery model
throughout North America, will:
 Eliminate the need for debt financing on
City accounts;
 Provide financing for all present and future
City water and wastewater capital costs;
and
 Avoid sharp increases in rates for the City
water and wastewater ratepayers.
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Community Feedback
Subsequent to Council’s review of the initial
business case summary during the February 22nd,
2016 Council meeting, a “Your Voice” night was
held on February 23rd, 2016 to obtain feedback on
the LUC from the community. City staff provided
information on the role of a utility corporation, the
rationale for considering a utility corporation in
partnership with EPCOR, how the LUC would meet
the City’s objectives and finally, the potential
impact to residents. City staff and EPCOR
representatives met with residents to discuss the
potential benefits, listen to any community
concerns, and answer questions.
Residents in attendance were provided with
takeaway materials including a Frequently Asked
Questions (FAQ) sheet and were solicited to
complete a questionnaire. Overall, conversations
with residents at the session were very positive.
Participants sought clarification on how a utility
corporation would operate in the City, what the
potential impacts would be on the residents and
potential timelines for development of the utility
corporation.
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Through discussion, three main questions
emerged:
 Is the proposed utility corporation a P3
(Public-Private Partnership)? If not, how
does it differ from a P3?
 How would the proposed LUC impact utility
rates in the future?
 Did the City explore other options?
Answers to these questions are provided below.
Administration will continue to invite residents’
feedback on this initiative through the City
website, social media and “Your Voice” initiatives.
Key Clarifications
In response to the questions received from
various community partners and residents, the
following additional information is intended to
better inform the community about the LUC and
provide clarification on key items.
2.4.1 Is This a Public-Private Partnership
(P3)?
No, the business arrangement contemplated is
not a P3. A P3 is a project and service delivery
model.
Municipalities can engage with the private sector
in a variety of ways for water and wastewater
service delivery. These can be categorized by:
 Project Delivery; and
 Utility Ownership.
The following sub-sections provide additional
information on each of these categories.
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2.4.1.1.
Project Delivery
Municipalities typically engage with the private
sector through some form of project delivery
model. In this way, the private sector partner
may perform various aspects of utility services
such as operations and maintenance or
completion of large capital projects. Services that
can be obtained from the private sector can be
categorized broadly into: design, build, finance
and operate.
In the traditional model, an engineering
consultant completes the design for the
municipality and a construction contractor builds
the facility. Project financing and asset
operations and maintenance remain with the
municipality. Alternative models combine
engineering and construction contracts in a
design-build package that is procured through a
competitive proposal process.
water and wastewater sector with one of the most
recent being the City of Regina Wastewater
Treatment Plant.
As illustrated in Figure 2 below, the more
involvement the private sector has in project
delivery, the less technical and financial risk the
municipality assumes. Regardless of which
project delivery model is used, the municipality is
the owner and the assets and any debt or
liabilities associated with the project are the
responsibility of the municipality.
Figure 2: Project Delivery Models
P3’s are a long-term performance-based approach
to project delivery for public infrastructure where
design, build, financing and operations can be
provided by the private sector company. The
private sector company assumes a major share of
the risks related to financing, construction and
long-term infrastructure performance through
operations and maintenance. There are many
examples of Public-Private Partnerships in the
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www.lloydminster.ca
2.4.1.2.
Utility Ownership
There are various general utility ownership
models, and Figure 3 illustrates some. A public
ownership model is where a municipality or
municipalities wholly own the utility. This utility is
either set up as a department within the
municipality, as Lloydminster’s water and
wastewater utilities are structured now within the
Public Works department, or as a municipal utility
corporation. On the other end of the spectrum is
private ownership where a municipality is not
involved in utility ownership, and rather, receives
services through a privately owned utility
company. The municipality maintains some
control of the service through franchise
agreements that allow the private utility to
provide services to the community.
Between these two extremes is the co-ownership
model, such as the one Lloydminster is
considering with EPCOR. In this proposed
arrangement, the LUC would be co-owned by two
publicly owned entities - the City Lloydminster
and EPCOR a fully owned corporation of the City
of Edmonton. The LUC will be responsible for all
aspects of water and wastewater services
including the capital works, finance, operations
and maintenance and overall commercial
management of the utilities.
Figure 3: Utility Ownership Models
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www.lloydminster.ca
The public co-ownership utility model is an
innovative alternative that has been implemented
in other non-water utilities in other jurisdictions.
There are currently no examples of this coownership model in water utilities and the City of
Lloydminster sees value in and is motivated to
pioneer this unique “Made in Lloydminster”
solution.
2.4.2 How Will the LUC Impact Utility Rates
in the Future?
One of the City’s key objectives in implementing a
utility corporation for water and wastewater
services is to ensure that utility rates are stable,
fair, equitable and affordable for the ratepayers of
Lloydminster moving forward.
Currently, the City’s utility rates include a fixed
and variable component. The fixed portion is
determined by meter size, so customers pay their
fixed charge based on the size of their meter.
The variable charge is based on how much water
is used and acts as a mechanism to promote
water conservation.
As noted in the City’s Water & Wastewater Rate
Bylaw (2016-2018), Council approved a utility
rate increase for fixed fees and a two-tiered rate
increase for variable fees. The variable rate
increase will be calculated on consumption levels
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per billing period of 1) up to 60 m3 and 2) over 60
m3. In this way, the cost to residential and
commercial customers will largely be dependent
on the quantity of water consumed.
The current approved annual rate increases are
summarized in Table 1 below.
Table 1: Approved Utility Rate Increases
Water and Wastewater Fee
2016
2017
2018
Fixed
2%
3%
3%
Variable (up to 60m3*)
2%
3%
3%
6.6%
3%
3%
Variable (60 m3 and over*)
*per billing period
Source: City of Lloydminster Water & Wastewater Rate Bylaw
With the creation of the LUC, under the utility
model, utility rates are based on the required
utility revenue (see Section 4.2) and are
determined through a regular rate filing and
approval process. For the purpose of examining
the viability of the LUC, utility rate increases have
been projected to remain consistent with the
current Water & Wastewater Rate Bylaw at 3%
per year in the financial model.
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To better understand how current rates compare
to those in other communities, a comparison of
monthly water and wastewater utility bills was
undertaken across a number of communities in
both Alberta and Saskatchewan. Based on a
consumption level of 20 m3 per month, the
monthly utility bills ranged from $59.96
(Lethbridge) to $104.00 (Regina).
The monthly bill for the City of Lloydminster is
currently just above the average across the
communities, as shown in Figure 4 below.
Figure 4: Water and Wastewater Monthly Bill
Comparison (based on 20m3/month)
Regina
$104.00
Wetaskiwin
$101.79
Calgary
$101.51
Edmonton
$101.21
Red Deer
$89.45
AVERAGE
$86.80
Lloydminster
$85.90
Saskatoon
Yorkton
Lethbridge
$72.19
$66.03
$59.96
$0.00 $20.00 $40.00 $60.00 $80.00 $100.00 $120.00
Source: City of Lloydminster
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2.4.3 Did the City Explore Other Options?
Yes, the City did explore other options. The City
submitted a funding application under the
Federal/Provincial infrastructure funding program
and was not successful in obtaining adequate
funding. The P3 option to deliver the wastewater
treatment facility was not considered viable as the
project cost would have had to be guaranteed by
the City and the City does not have the debt
capacity to assume this liability on its account.
Additionally, the City desired to maintain its
operating position and oversight of the water and
wastewater utility.
2.4.4 What Will a New Wastewater
Treatment Facility Cost?
In 2014, the City identified that upgrading its
wastewater treatment facility to accommodate 10
years of growth would cost approximately $47.2
million. Given the magnitude of the initial
investment and the potential for grant funding the
City submitted an application to the Building
Canada Fund for a wastewater treatment facility
project that would accommodate 20 years of
growth in the amount of $74 million. The City
subsequently commissioned a preliminary design
study for the wastewater treatment facility
upgrades. The recommended design incorporated
a Moving Bed Biofilm Reactor (MBBR) treatment
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technology and assumed 20-years of population
growth. The MBBR treatment process was
selected as it provides a high quality effluent that
the City could use to generate revenue from
industry reclaimed water users. The estimated
cost for this type of wastewater treatment facility
upgrade was determined to be $94 million in late
2015.
A value engineering study is currently underway
to examine options for reducing the overall
project costs and to identify if there is a possibility
to phase the construction over time. Initial results
from the value engineering study indicate that
construction costs for the wastewater treatment
facility could be reduced from $94 million to $73.8
million. These reductions are attributed to design
revisions and incorporating a more conventional
Biological Nutrient Removal (BNR) treatment
process. Potential phasing options are currently
under review with the objective being to further
reduce the expected capital cost of the facility in
the initial phase.
In accordance with the City of Lloydminster
Charter and the guiding Municipal Government
Act in the province of Alberta, the debt limit of a
municipality is based on the municipality’s total
revenue. The initial business case assumed a total
debt limit for the City of $134 million which was
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based on 2014 total revenue, as shown in Figure
5. Since then, it has been determined that the
debt limit should be reduced to $114 million to
reflect the City’s total revenue in 2015.
Consequently, a maximum of $56 million of
borrowing capacity is available - leaving a
shortfall of $18 million in financing for the $73.8
million wastewater treatment facility project
alone.
Figure 5: Debt and Debt Capacity
In addition to planned upgrades for the
City’s wastewater treatment facility,
the City has identified a number of
other important capital project
investments that will be required to
support economic development, social
programs and services, and positive
environmental outcomes. Table 2
summarizes the capital project
investments over and above the
wastewater treatment facility that are
anticipated over the next 10 years.
These costs are conceptual and include
engineering and contingency. The
portion of costs that are attributable to
developers is currently under review.
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www.lloydminster.ca
Table 2: 10 Year Capital Plan Projects
Economic Development
Required Funding
North-South Corridor
$59,090,000
Regional Airport Expansion
$15,000,000
Fibre To The Premises
$36,000,000
Rail Grade Separation 62nd Ave
and 52nd Street
$30,000,000
Social Programs and Services
Required Funding
New Public Transit
$3,500,000
Indoor Pool
$45,000,000
Lloydminster Cultural and
Science Centre
$65,000,000
Environmental
Required Funding
Solid Waste Management Landfill
$10,000,000
Dedicated Water Main
$15,000,000
Water Treatment Facility
Expansion
$52,100,000
Cast Iron Replacement
Program
$20,000,000
LED Street Light Upgrade
Financing the construction of the wastewater
treatment facility and other capital project in the
10 year planning horizon using City debt is
infeasible, taking into account:
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Available total debt capacity;
The need for additional water and
wastewater investment after the new
wastewater treatment facility is built; and
The need to preserve debt capacity for
investments other than for water and
wastewater infrastructure.
2.4.5 Is the City Following its Purchasing
Policy?
Yes. The City’s purchasing policy references the
New West Partnership Trade Agreement which
specifically exempts water services and
investments pertaining to water. The City of
Lloydminster has established that EPCOR is best
positioned to complement the strengths that the
City brings to the Lloydminster Utility Corporation.
Further rationale for the decision to partner with
EPCOR is provided in Section 3.
$5,200,000
Source: City of Lloydminster
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www.lloydminster.ca
3.
THE PARTNERSHIP
Based on the initial business case analysis, the City should enlist a strategic partner to share the equity
investment for two reasons:
1. If the City was to cover the full cost on its own, it will quickly exceed its borrowing limit; and
2. If the City became the sole shareholder of the LUC, its investment may be seen under current
accounting rules, as City debt. In this case, the City debt limit would be exceeded.
Given these considerations, the City has determined that a strategic partner will be required in order to
implement the LUC. The City has identified EPCOR Utilities Inc. as its Strategic Partner of choice based on
its ability to provide financing, major capital project expertise, experience with municipalities in Alberta
and Saskatchewan, as well as common goals and priorities shared with the City.
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www.lloydminster.ca
Figure 6 outlines how the Lloydminster Utility Corporation, in partnership between the City of Lloydminster
and EPCOR, could be structured. The figure highlights the expected contributions and distributions for
each partner, joint ownership in the LUC, the scope of services included in the LUC as well as ratepayer
participation.
Figure 6: Lloydminster Utility Corporation Structure
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What Does the City of Lloydminster Bring to the Partnership?
The City has identified two principal areas of
contributions in creating the Lloydminster Utility
Corporation in partnership with EPCOR.
Firstly, the City’s existing water and wastewater
systems. Systems that have been decades in the
making and paid for by the many residents,
business owners and developers of the
Lloydminster community.
The accumulated depreciation of these assets is
estimated at $79 million, and the contributed
assets (assets contributed by developers and
through grants) are estimated at $36 million.
Secondly, the City’s people. The City
brings a team of passionate
individuals who bring unmatched
knowledge of the existing systems
and are passionate about living in the
City and providing reliable water and
wastewater services to the citizens of
Lloydminster.
3.1.1 Water and Wastewater
Assets
Utility corporations use the value of
their existing assets to generate
revenue. The gross book value
(before depreciation) of the City’s
water and wastewater system, as of
October 31, 2015, is reported to be
$192 million as shown in Figure 7.
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Together with the capital work in progress this
results in approximately $77 million in net water
and wastewater assets, which represents the
maximum possible initial Rate Base. These
concepts are described further in Sections 4.4 and
4.5.
A portion of the $77 million in potential
“Rate Base” assets will be vended into
the LUC as earning assets. The
remainder of the City’s water and
wastewater assets will also be vended
into the LUC as non-earning assets.
Figure 7: Existing Water and Wastewater Assets
The City’s water and wastewater assets
are critical to the success of the
Lloydminster Utility Corporation – in
terms of both generating the required
revenue and continuing to provide
reliable service to the citizens of
Lloydminster.
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www.lloydminster.ca
3.1.2 Our People
The City’s people are the foundation of the
success of its utilities. The City has invested
heavily in training and development, and our
people possess the local knowledge and expertise
to deliver services.
In this model, Distribution and Collection,
Wastewater Treatment, and Water Treatment
teams together with the City’s Utility Engineer will
become employees of the Lloydminster Utility
Corporation, under CUPE 1015, and will continue
to provide world class service to our residents.
In collaboration with CUPE Local 1015, we are
committed to a solution that is in the best
interests of the City's most valuable asset – our
people. It is imperative that our team of caring
individuals who have chosen to make
Lloydminster their home have the training,
support and resources necessary to be successful
in their career path. This will be done through
open, consistent and regular dialogue both with
CUPE at a local, national and provincial level, and
all of our teams who are working hard every day
to ensure that residents have the highest quality
of services.
The City’s teams contribute to the communities
where they live and work and are proud to call
Lloydminster home. Whether it's sitting on a local
planning committee, serving as a board member
of a non-profit organization, volunteering at
community events or hosting a staff fundraiser,
City staff are committed and dedicated to making
a difference.
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www.lloydminster.ca
What Does EPCOR Bring to the
Partnership? Why EPCOR as a
Partner?
The City identified EPCOR as its strategic partner
of choice. EPCOR offers:
1. Financial ability to meet the investment
needed to achieve the long-term funding
objectives; and
2. Major capital project and utility expertise
as the City’s water and wastewater
infrastructure continues to grow in scale
and complexity.
EPCOR is a utility company that provides water,
wastewater and electrical utility services and is
wholly owned by the City of Edmonton. EPCOR
currently serves over 1.9 million people in 100
communities across Saskatchewan, Alberta and
British Columbia as well as 29 jurisdictions in the
United States. Its core expertise is in water
management, providing services in areas
including drinking water, domestic wastewater as
well as water reclamation and reuse. EPCOR also
invests in water related assets through Design
Build Finance Operate projects, capital leases,
Public-Private Partnerships and regulated
investor-owned utilities. EPCOR has achieved
success as a municipally-owned utility company
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and is motivated to implement similar “coownership” models in other municipalities
throughout Canada.
EPCOR has a proven track record of delivering
projects on time and on budget, and understands
day-to-day operational impacts. For example, in
Regina, EPCOR is responsible for constructing,
financing and operating a new wastewater
treatment plant planned for completion in
December 2016. In Kananaskis, EPCOR
constructed upgraded water and wastewater
treatment plants, completed in July 2014, and
continues to operate and maintain the facilities. In
addition to providing operations and maintenance
services to various municipalities in western
Canada, EPCOR invests in significant capital
projects at its E.L. Smith and Rossdale water
treatment plants, its Gold Bar wastewater
treatment plant and its water distribution and
transmission system in the City of Edmonton.
www.lloydminster.ca
As a strategic partner, EPCOR aligns well with the
values and growth strategies of the City of
Lloydminster. EPCOR is committed to protecting
public health and the environment, ensuring
financial sustainability, providing opportunities for
people through training, and being responsible to
ratepayers for providing reasonable rates for the
services they provide.
In addition to having shared values and
community growth strategies, EPCOR has
significant experience operating water and
wastewater utilities in both Alberta and
Saskatchewan. EPCOR’s technical and financial
expertise, as well as access to capital investment
funds, will bring value to the City’s evolving
operational needs.
While the LUC will be the employer of the staff,
EPCOR as a partner and co-owner has many years
of experience in working with unions. In 1996, the
City of Edmonton converted the City of Edmonton
Water Branch to an entity that eventually became
known as EPCOR. All of the existing management
and union staff were transferred to this new
entity. EPCOR works proactively with many
bargaining units across various provinces to
provide a positive work environment and fair
compensation terms. Historically, EPCOR has
worked with three large unions, IBEW 1007, CSU
52 and CUPE 30. While IBEW is the largest union
in EPCOR Utilities employee base, CUPE is the
largest union in the EPCOR Water Canada
employee base. In addition to the larger
Edmonton groups, EPCOR also has water
employees represented by CUPE 21 in Regina and
CUPE 2038 in Taber.
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www.lloydminster.ca
4.
BUSINESS CASE ANALYSES
The City and EPCOR jointly commissioned the
development of the business case to examine the
financial viability and non-financial considerations
associated with creating the LUC. Again, the City’s
objective in pursuing the development of a utility
corporation is to provide a solution that will:
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Eliminate the need to fund water and
wastewater infrastructure using City debt;
Provide the required financing for all future
City water and wastewater capital and
operating costs; and
Avoid sharp increases in rates for City water
and wastewater ratepayers.
Financial Model Overview
A financial model was independently developed by
PricewaterhouseCoopers (PwC) to support the
business case and demonstrates viability of the
LUC. It is an Excel-based model that employs a
number of inputs and assumptions to calculate
the financials of the utility corporation. These
financials include the required revenue under the
utility model and the equity investments and cash
flow requirements over the planning horizon of
the capital infrastructure master plans. The
financial model uses a variety of assumptions and
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a number of technical inputs from relevant
historical and ongoing infrastructure plans - all
provided by the City and EPCOR.
The model was developed to examine the viability
of the utility corporation and the sensitivity of the
assumptions used in the model. The current
financial model is not intended to be a detailed
model for the purpose of informing a financial
transaction between the City and EPCOR. Several
simplifying assumptions, as outlined in Section
4.3, were made in the financial model to allow the
City and EPCOR to efficiently examine the viability
of the LUC. Further due diligence is required to
determine the appropriate inputs and assumptions
for the financial model used to finalize the
financial transaction and term sheets, as noted in
Section 5 of this report.
The Utility Corporation Model
Utility corporations are separate entities from
municipalities, although they may be owned in
whole or in part by municipalities. A utility
corporation provides utility infrastructure and
services and earns the required revenue through
rates charged to customers.
Municipalities see value in the utility corporation
model for a variety of reasons. Under specific
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conditions the utility corporation’s debt is not
attributed back to the municipality – this is a key
objective for the City of Lloydminster. The utility
corporation approach allows City income and debt
capacity to be available for other important
municipal investments such as roads, parks and
recreational facilities.
Central East Regional Water, Aquatera and the
Sheep River Regional Utilities Corporation.
A utility corporation model works quite differently
from the City’s traditional municipal water and
wastewater model. In both models, utility rates
are set based on the required revenue; however
the components of the required revenue differ.
Figure 8 highlights some of the differences in
required revenue between the traditional
municipal model and the utility model.
Figure 8: Required Revenue:
Municipal vs Utility Model
The LUC would assume all responsibilities for
continued delivery of water and wastewater
services in the City, and for all investment in the
infrastructure required to provide these services
going forward according to City growth
requirements and good utility practices. The utility
corporation model has been successfully used by
a number of municipalities and is a well
understood model for utilities. Once established,
utility corporations are typically viewed as credit
worthy by lenders. In fact, there are a number of
examples of successful utility corporations
throughout Alberta and Western Canada
including; EPCOR Utilities Inc., SaskWater, Alberta
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In both the utility corporation model and the
municipal model, required revenue ultimately
comes from ratepayers and as noted in Figure 8,
operations and maintenance costs are part of the
required revenue each year for both models.
However, the funding and cost of capital
expenditures are determined differently in the two
models.
Under a municipal model the required revenue for
the year must be sufficient to fund any required
capital expenditures and any associated debt
servicing (principal and interest payments).
Shortfalls in the required revenue must be funded
through other municipal sources (taxes, other
department budgets, etc.) or through debt.
Under the utility corporation model, capital
expenditures for the year are funded through debt
and equity. Capital recovery occurs over time
through the inclusion of depreciation (principal),
interest on debt and return on equity in the
utility’s required revenue. By recovering
depreciation in the required revenue, the asset
principal costs are spread over the asset life.
For the purposes of determining the required
revenue under the utility corporation model,
depreciation, interest on debt and return on
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equity are calculated on ‘Rate Base’. Therefore
the utility’s Rate Base is considered to be the
‘earning assets’ of the utility and that which
derives the ‘value’ of the utility. The Rate Base
can include both fixed assets (net of depreciation
and contributions) and working capital.
A utility corporation raises all capital required to
deliver on its mandate, including debt and equity.
The utility corporation would borrow from lenders
according to sound utility treasury practice under
prevailing capital market conditions and as based
on the corporation’s creditworthiness. The utility
corporation would raise equity through investment
from its shareholder(s).
A rate stabilization fund is another item that can
make up required revenue under the utility
corporation model. In situations where large
capital investments are required, a rate
stabilization fund is commonly used to smooth
rates over time, keeping rate increases
predictable and gradual.
Under the municipal model, capital reserves can
play a similar role; however, reserves are
generally used specifically for capital replacement
and not to stabilize rates. Further, in
circumstances where a large capital investment is
required, the municipality would have to build
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Key Assumptions
reserves for a significant number of years to
accumulate enough to fund the expenditure.
Utility corporations are regulated to ensure that
ratepayer interests are protected. Under the
utility model, a regulatory authority approves
rates charged by the utility corporation through a
rate filing and approval process. Rates are based
on the required revenue of the utility. There are
at least two potential regulatory authority options,
both of which are established in Alberta utility
practice. The utility may be regulated by the:


Alberta Utilities Commission (a provincial
body); or
Municipality according to appropriate bylaw(s) and agreement(s).
The appropriate regulatory framework for the LUC
is currently under review.
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Several assumptions were used for the inputs and
development of the financial model for this initial
business case. The intent of this section is to
provide a brief description of the notable key
assumptions and how each relates to the financial
viability of the LUC. The financial viability model
assumptions are thought to be conservative with
the intent that the financials of the business case
becomes increasingly positive as assumptions are
validated.

Population Growth – This is the annual rate
at which the number of individuals living in
the City of Lloydminster increases as a
percentage of the initial population.
Population growth is affected by four
factors: births, deaths, immigration, and
emigration. The City’s Comprehensive
Growth Strategy (August 2013) included a
summary of the City’s average population
growth rates over various intervals from
2011, ranging from the past 5 years to the
past 50 years as shown in Table 3.
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The rate of population growth is used to
estimate water consumption which directly
impacts the annual required revenue and
the associated required rate increases. It
also impacts the timing of growth related
infrastructure upgrades as well as the
assumptions around the timing of collection
of offsite levies.
Table 3: Average Population Growth, Selected
Timeframe to 2011
Timeframe
Ending in
2011
Average
Annual
Growth Rate
Last 50 years
3.2%
Last 45 years
3.1%
Last 40 years
2.9%
Last 35 years
2.9%
Last 30 years
1.8%
Last 25 years
1.9%
Last 20 years
2.4%
Last 15 years
2.6%
Last 10 years
2.9%
Last 5 years
3.0%

Consumption per customer – This is the
number of cubic meters of water that each
customer consumes. For the purposes of
this model, consumption is assumed to hold
constant with the 2016 budgeted levels.
Changes in customer usage such as
reductions through conservation efforts will
impact this assumption. Together with
population growth this impacts the
estimated water consumption which directly
impacts the annual required revenue and
the associated required rate increases, and
also impacts the timing of growth related
infrastructure upgrades.

Water and Wastewater Rate Increases –
Water and wastewater utility rates pay for
all the items included in the required
revenue as described in Section 4.2. This
variable represents the annual water and
wastewater rate increases. For the purpose
Source: City of Lloydminster Comprehensive Growth Strategy
The City’s Comprehensive Growth Strategy
projects an average annual growth rate of
approximately 2.1% through to 2041. Due
to current economic conditions, the annual
population growth for 2016 is assumed to
be 0% and then 2.1% is used through to
2041.
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of examining the viability of the LUC, utility
rate increases were modeled to remain
consistent with the Water & Wastewater
Rate Bylaw at 3% per year. In the financial
model, water and wastewater rate increases
are based on the annual required revenue.
As noted throughout this section, variations
in all of the assumptions impact the annual
required revenue and therefore would have
a direct impact on the annual water and
wastewater rate increases.

Offsite Levies – Offsite levies are fees
developers pay to cover the cost of future
infrastructure required to service their
development, but are not located on their
property – for example upsizing a major
wastewater trunk main. Capital plans for
water and wastewater were developed
through the City’s recent master planning
studies that also identified the allocation of
benefit to future growth areas. Using
projected growth rates, the model
anticipates future offsite levy collection
amounts over time and in turn determines
the carrying costs of delivering the projects
prior to the necessary funds being in
place. The financial model assumes that
offsite levies are sufficient to fund all capital
expected to be funded from off-site levies
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over the model period and therefore
assumes the offsite levies are appropriately
set to recover these amounts. Further
review is required to ensure that the offsite
levy assumptions used in the model will
align with the City’s proposed offsite levy
bylaw (currently in draft form). Changes to
the various offsite levy assumptions will
impact the annual required revenue.

Water and Wastewater Capital Projects –
These are projects that sustain the existing
infrastructure for the water and wastewater
systems, as well as expand these systems
in the future in response to growth or new
regulatory conditions. Changes to the
assumptions for capital projects will impact
the required revenue as depreciation,
interest and returns are included in required
revenue. Municipal capital projects fall into
three main categories:
o Sustaining Capital – These capital
investments are required over time to
renew or replace existing
infrastructure that is at the end of its
useful life. For the purpose of the
business case, the investment in
sustaining capital is expressed as a
percentage of total capital costs and
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was developed based on current
industry best practices.
agencies as well as the City’s water and
wastewater policies. These costs include all
costs to operate, maintain, and administer
the water and wastewater infrastructure and
the utility corporation itself. While the City’s
existing operating costs are well understood
and have been used in the financial model,
the complexity of the City’s water and
wastewater systems will increase as
advanced treatment facilities are
constructed. Future operating costs have
been informed by EPCOR based on
experience operating similar water and
wastewater systems. Changes in the
operating costs will impact the annual
required revenue.
o Growth Capital – This refers to capital
projects that are required to provide
service to future growth areas in a
community. Growth capital projects
could be associated with new
residential, commercial, or industrial
developments in the City. The costs
for these capital projects are
summarized in Section 2.4.4.
o New Regulatory Capital – These
capital projects are required in
response to changing regulatory
requirements. Regulatory changes
could be imposed at the federal,
provincial or even municipal level. For
example, the City’s new wastewater
treatment facility is required in order
to comply with Saskatchewan Water
Security Agency’s (WSA) effluent
water quality requirements, which
come into effect in July of 2017.

Operating Costs - Operating costs include all
water and wastewater system costs
associated with providing a level of service
that meets the standards of regulatory
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
Level of Service – The level of service for
municipal water and wastewater systems
refers to the quality, quantity, capacity,
reliability, accessibility, and affordability of
the service that is being provided. Any
changes to those levels of service could
have an impact the timing, cost and type of
projected capital projects, as well as on the
operating costs required to meet the levels
of service, both of which impact the
required revenue.
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


Other Revenue Sources – This refers to
water and wastewater related revenue that
the City currently receives outside of
taxation, fees and charges, grants and
developer contributions. This includes fire
hydrant rentals, and bulk water sales. The
revenue received from the Husky Energy
Raw Water Servicing Agreement (circa
1991) is another example. Some of these
other revenue sources may have
undesirable taxation implications for the
utility corporation and therefore further due
diligence is required around taxation and
accounting rules related to the other source
revenues. The amount of other revenue has
an impact to the amount of required
revenue needed to be funded by rates and
therefore impacts the annual water and
wastewater rate increases.
Cost of Debt – The borrowing cost is based
on the interest rate charged on debt by the
lenders of the LUC. The interest rate is
currently assumed to be 4.67%, which is
representative of borrowing rates for
established regulated utility companies in
Canada. The actual cost of debt for the LUC
will be determined based on lenders’
assessment of the creditworthiness of the
LUC, which is based on a variety of factors.
Variations in the interest rate will impact the
required revenue, since the actual cost of
debt is used to determine required revenue.

Return on Equity – Similar to an interest
rate, the return on equity is a defined
percentage return on the investment
shareholders make in the LUC. The return
on equity is meant to provide the
shareholder with a fair return for their
investment for the associated investment
risk. The return on equity is currently
assumed to be 8.3% which is consistent
with Alberta utility practice as reported by
the Alberta Utilities Commission. Variations
in the return on equity will impact the
required revenue.

Non-taxable Entity - At this time, the LUC is
assumed to be non-taxable and therefore no
income taxes have been modeled or
included in the required revenue. This
matter is under study and changes in this
assumption would impact the required
revenue.
Debt to Equity Ratio: The relationship
between debt and equity (the “Capital
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Structure”) is defined as the proportions of
debt and equity funding the operations of a
company, expressed as a ratio of
Debt:Equity (which, when combined, will
equal 100). The Capital Structure is
assumed to be 60% debt and 40% equity,
consistent with Alberta and Saskatchewan
utility practice.

Regulatory Authority – The current financial
model and business case assumes that the
LUC is regulated by the City of Lloydminster
for both water and wastewater services. A
change in this assumption may impact some
of the other assumptions used in the model.
These assumptions were developed to examine
both the financial viability, as well as the
implications associated with creating the LUC.
Further due diligence is required to examine the
reliability and sensitivity of the assumptions and
to further refine the details of the financial model
informing the development of the LUC and the
associated agreements in partnership with
EPCOR.
30
Net Value of Water and
Wastewater Assets
Under a utility corporation model, the utility is
allowed to earn a return on its Rate Base. A utility
is not allowed to earn a return on capital that it
has already recovered or that it never paid for
originally. Therefore, the Rate Base, or ‘earning
assets’ is determined based on the gross book
value of assets, less accumulated depreciation,
less grants and contributed assets.
The gross book value (before depreciation) of the
City’s water and wastewater system, as of
October 31, 2015, is reported to be $192 million
including contributed assets (assets paid for by
developers and/or through grants) and $2 million
in capital work in progress that is estimated to
exist at the time of the LUC creation. Accumulated
depreciation is estimated at $79 million, and the
net book value of the total asset base after
depreciation is reported at $113 million as shown
in Figure 9.
is not allowed to earn a return on capital that it
has already recovered or that it never paid for
originally. Therefore, the Rate Base, or ‘earning
assets’ is determined based on the gross book
possible initial Rate Base for the LUC. The actual
amount of grants and contributions received by
the City is not currently known but for the
purposes of this initial business case the value has
been estimated at $36 million. Together with the
capital work in progress this results in
approximately $77 million in net assets, which
represents the maximum possible initial Rate
Base as shown in Figure 9.
Figure 9: Existing Water and Wastewater Assets
The City has received both grants and
contributions in the form of offsite levies. The
value of these must be excluded from the Rate
Base; therefore, the value of all grants and
contributions must be deducted from the net book
value in order to determine the maximum
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The City is estimated to have approximately $10
million in debt specific to water and wastewater
services at the time the LUC is created.
As part of the initial formation of the corporation,
the City would transfer all assets to the LUC along
with the associated debt as the LUC would
become the owner of all water and wastewater
assets. The financial model determines the
appropriate amount of assets to assign to Rate
Base (up to the maximum possible initial Rate
Base of $77 million) based on the various
assumptions identified in Section 4.3 including the
annual water and wastewater rate increases.
The value of the initial investment into Rate Base
by EPCOR is determined by the amount of assets
that are assigned to Rate Base less any
associated debt.
While the non-Rate Base assets have an intrinsic
value they are not considered as part of the initial
investment into Rate Base.
The specifics of how the non-rate base assets will
be accounted for in the transaction and
partnership will be decided during term sheet and
definitive agreement development.
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Base Scenario - Assets into Rate
Base
As noted in Section 4.4, the financial model
determines the appropriate amount of assets to
assign to Rate Base based on the various
assumptions identified in Section 4.3. Assigning
the full $77 million in net assets to Rate Base
would have an impact on the required revenue
and ultimately increase the water and wastewater
utility rates. The higher the value of assets in
Rate Base, the more debt and equity required –
this increases the interest and return that must be
generated from the required revenue. Apart from
the limited other revenue sources as described in
Section 4.3, the only way to generate revenue is
through the rates. The portion of the net assets
assigned to Rate Base occurs at the time of the
creation of the LUC and forms the basis for initial
financial investment into Rate Base and therefore
cannot subsequently change.
It is important when determining the financial
investment to ensure that the portion of the net
assets originally brought into the Rate Base is
limited so that excessive rate increases are not
required to fund future capital requirements
including the new wastewater treatment facility.
Future capital investments and sustaining capital
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required to construct new infrastructure will be
added to Rate Base and must also be funded by
utility rates.
To determine viability in this business case, a key
objective was to hold the maximum annual water
and wastewater increases in revenue to 4.7%,
which with the projected population growth rate
of 2.1%, results in utility rate increases of 3%. To
achieve this objective, the financial model
estimates that approximately 45% of the $77
million in net assets can be assigned to the Rate
Base of the LUC. As shown in Figure 10, this
equates to $36 million in assets (including the
capital work in progress) being assigned to Rate
Base.
Figure 10: Base Scenario Rate Base & Recapitalization
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The City will also transfer debt associated with
assets in the amount of $10 million resulting in a
net value of assets brought by the City into the
Rate Base of $26 million, as shown in Figure 10.
The business plan contemplates the City and
EPCOR incorporating the LUC as 50/50 equity
partners. In the context of EPCOR’s initial
investment in the Rate Base, the $26 million net
value of assets in the Rate Base represents the
starting value of equity. As such, EPCOR’s initial
investment in the Rate Base would be $13 million
(see Figure 11), which will be paid to the City to
cover half of the net value of assets that the City
brings to the Rate Base.
Figure 11: Initial Investment
& Equity Share
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An additional step in establishing the LUC is the
restructuring of the $36 million in assets assigned
to Rate Base so that it meets the 60/40
recommended debt to equity ratio. As shown in
Figure 10, the debt portion of the LUC is
estimated at $21.6 million which includes the $10
million in existing debt being transferred from the
City to the LUC ($11.6 million in new debt). The
recapitalization would result in an estimated
$14.4 million initial equity position held equally
between the City and EPCOR ($7.2 million each)
as shown in Figure 11.
The proceeds from debt recapitalization are
allocated to the City and EPCOR in equal parts of
$5.8 million each as shown in Figure
11.
Therefore, at the start-up of the
corporation the City, as equity partner
in the LUC, will have approximately
$18.8 million from the initial equity
investment and debt proceeds from
the recapitalization that it may place in
reserve to fund future equity
requirements for the LUC (see Figure
11).
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Investments in the future capital needs of the LUC
will be shared by the City and EPCOR and the
parties’ respective share of the equity of the LUC
will vary as a function of future investments.
As noted in Section 4.2, a rate stabilization fund is
commonly used in the utility model to help keep
utility rate increases predictable and gradual.
Figure 12 illustrates the projected revenue
requirements associated with the base scenario
between 2017 and 2031 as well as the impact
that the rate stabilization account has in terms of
maintaining consistent rate increases.
Figure 12: Rate Stabilization Fund – Base Scenario
ASSUMES 3% ANNUAL
UTILITY RATE INCREASE
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The sharp required revenue increases through
2017-2020 is largely associated with the new
wastewater treatment plant both to cover the
depreciation, interest and return on the capital
and the increased operations and maintenance
costs resulting from the increased treatment
complexity associated with the facility. However,
the LUC’s required revenue varies from year to
year mainly as a function of the projected annual
capital program.
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It is important to note that in this initial business
case utility rate increases have been assumed to
remain constant at 3% per year. In years where
the “required revenue” is less than the “total
revenue”, the surplus is held in the rate
stabilization fund. In years where the “required
revenue” is greater than the “total revenue”, the
surplus is withdrawn from the rate stabilization
fund. In this way, ratepayers are not exposed to
sharp increases in rates to accommodate capital
program needs.
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Capital Project Funding
Capital projects sustain the existing infrastructure for the City’s water and wastewater systems and
expand these systems in the future in response to growth or new regulatory conditions. Municipal capital
projects fall into three main categories; sustaining capital, new regulatory capital and growth capital as
described in Section 4.3. Under the utility model, funding for these projects is derived from three different
sources including:



The City and EPCOR in the form of equity;
Lenders in the form of debt; and
Developers through the payment of offsite levies (associated with growth capital).
Figure 13 illustrates the relationship between the various sources of funding, the LUC, and the capital
projects.
Figure 13: Capital Project Funding
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Sensitivity Analyses
As noted in Section 4.5, there is a direct relationship between the amount of assets being assigned to Rate
Base and the annual rate increases. If the City increases the assets brought into Rate Base, it must also
increase the utility rates to generate the required revenue.
The base scenario assumes that $36 million of the potential $77 million in net assets can be assigned to
the Rate Base. Under this scenario a 4.7% increase is required annually to the estimated total revenue.
This scenario incorporates the assumptions noted in Section 4.3 including an average population growth
rate of 2.1% which allows for the annual increase in utility rates to be maintained at 3%.
Two additional options were considered to see what would happen if the City brought more assets into the
initial Rate Base. Figure 14 summarizes the implications associated with assigning $45 million and $60
million to the Rate Base.
Figure 14: Potential Initial Rate Base Options
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In all three options, the franchise fee,
taxes/transfers, depreciation of assets and
operations and maintenance expenses of the LUC
are identical. The only changes to the required
revenue of the LUC are the return on equity and
the cost of debt associated with each different
Rate Base value.
It is also worth noting that if annual population
growth rates were less than the anticipated 2.1%
this could have the effect of higher utility rates.
Short duration periods of low growth rates could
be absorbed by the rate stabilization fund,
however, extended low growth periods would
result in higher utility rates to generate the
required revenue of the LUC.
The estimated annual utility rate increases
associated with assigning $45 million and $60
million to the Rate Base are 3.5% and 4.3%,
respectively. These two options are not consistent
with the City’s current Water and Wastewater
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Rate Bylaw that limits rate increases to 3% per
year.
Viability
The results of the initial business case
demonstrate that developing a utility corporation
to provide water and wastewater service in
Lloydminster would:
 Maintain reasonable water and wastewater
rate growth;
 Provide for funding of future water and
wastewater infrastructure without incurring
additional City debt;
 Allow a Strategic Partner to invest equity in
the utility corporation and provide support
and experience in developing a utility
corporation; and
 Provide the City with revenue that may be
used to advance other City priorities.
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Impact to Overall City Finances
The creation of the Lloydminster Utility
Corporation has an impact on both the operating
and capital budgets of the City.
With respect to capital budgets, the LUC allows
the City to utilize debt capacity for other city
priorities such as roads, parks and facilities. The
debt capacity of the City is based on the
municipality’s total revenue. After formation of
the LUC, revenues previously attributable to the
City in the amount of $18.5 million annually
(2016 budget) will become dedicated to the LUC
and will not be taken into consideration for the
cities debt limit. The City’s debt limit will be
reduced by $28 million as a result. Existing utility
debt of $10 million will be removed from the
balance sheet resulting in an overall reduction of
debt capacity of $18 million. This will reduce the
existing debt capacity of $56 million (Figure 5) to
$38 million. It is important to note that without
the creation of the LUC the City would need to
utilize its entire debt capacity to construct the
new wastewater treatment facility - preventing
the City’s ability to fund other priority capital
projects (see Table 2).
With respect to operating budgets the City
currently benefits from net utility revenues in the
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amount of $4.1 million annually (2016 budget).
These net revenues (total revenue less total
expenses) are redirected from the utility to cover
other City operating expenses. Within the utility
model all net revenue of the utility is required to
remain within the utility to fund capital
expenditures. The City of Lloydminster will benefit
from the following sources of revenue from the
LUC (dividends, return on equity, property taxes
and franchise fees). The business case assumes
that a portion of the dividends, return on equity
and property tax revenues are re-invested into
the LUC in order for the City to meet future cash
calls for equity. The franchise fees are assumed
as a defined release to the City of Lloydminster in
the amount of $250,000 annually.
It has been identified that the City of Lloydminster
will require a period of time to transition from net
utility revenues of $4.1 million to $250,000. It is
anticipated that a combination of funds resulting
from the initial investment in Rate Base and net
revenues from the portion of dividends, return on
equity and property taxes not required for equity
cash calls will provide the financing required for
this transition strategy. A transition strategy will
be developed in future phases of the LUC business
case.
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5.
NEXT STEPS
Completion of the initial business case and
demonstrating the financial viability of the
Lloydminster Utility Corporation in partnership
with EPCOR represents an important milestone.
Administration is seeking a resolution from
Council at its upcoming meeting on March 28th,
2016 to continue with the creation of the
Lloydminster Utility Corporation in partnership
with EPCOR by developing a detailed financial
model, term sheets and definitive agreements.
The results presented in this initial business
case are illustrative and use several key
assumptions which require
further due diligence.
This process will include the review and
refinement of inputs and key assumptions, as well
as creation of a detailed financial model to inform
the financial transaction between the City and
EPCOR.
Figure 15 outlines the three distinct phases
associated with creating the utility corporation,
along with the approximate timelines associated
with each phase. The Figure also describes key
areas of due diligence and how those variables
are further refined through the second and third
phases of the LUC development.
Figure 15: Due Diligence Moving Forward
The City will continue its
due diligence to facilitate
the development of the
detailed financial model,
term sheets and definitive
agreements.
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In addition, as the development of the LUC
progresses the City will address any other
associated legal considerations and approvals
including obtaining required Ministerial approvals
and amendments to the City’s Charter and various
Bylaws.
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The City of Lloydminster is committed to keeping
citizens informed and educated on this topic and
aware of how a utility corporation would benefit
them moving forward. www.lloydminster.ca/LUC
will continue to be the source for all public
engagement opportunities connected to this
initiative. The next Your Voice event will be held
in May of 2016.
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