Chapter 6

Cashflow Projection

The cashflow projection is a basic reference in the establishment and review of water rates. The cashflow indicates the sufficiency/insufficiency of existing and proposed rates; determines the need for any rate increase; serves as basis for monitoring the district's operations; determines the ability of the district to make forecasts; and presents the district's financial picture for a given period as a consequence of the rates.

1. PERIOD OF PROJECTION

Apart from the existing water rates of a district, new rates are established for the following reasons:

Purely, to meet increasing O & M expenses.

To make feasible arrears restructuring.

To make feasible restructuring of outstanding loans.

To make feasible grant of new loans.

The rate proposal shall be supported by an eight (8) year cash flow projection, which shall commence on the current year.

2. CONTENTS OF CASHFLOW

To serve its purpose, cashflow projection should contain the following basic information:

GENERAL DATA

Year-end Connection. Previous year-end connections plus the annual market growth.

Mid-year Connections. The average of the preceding year-end connections and the current year-end connections.

Market Growth. The increase in the number of connections for the current year.

Service Area Population. The population in the service area as projected.

% Population Served. The ratio of the number of year-end connections multiplied by the average number of persons per household to the service area population.

Consumption/Connection/Month - cum. Historical six months to one year billed water divided by the average number of service connections billed during the period.

Billed Water -'000 cum. The volume of water sold and paid for by the concessionaires, known also as the revenue-producing water. This is obtained by multiplying the mid-year connections by the consumption per connection per month (cum), multiplied by twelve months and divided by 1000.

Non Revenue Water (NRW), %. The difference between the production and the billed water expressed as a percentage of the former. This is the historical or target percentage of billed water and total production subtracted from 100. This represents losses in the system largely due to leaks and consumption of illegal connections.

Production - '000 cum. The volume of water needed to be supplied by the district, taking into account the water demand as influenced by service growth. The water source should be capable of providing the required volume to be generated. This is computed as billed water divided by 1 minus non-revenue water (expressed in decimals).

Effective rate - P/cum. Historical water sales divided by billed water.
Percentage Rate Increase. The weighted average rate increase computed by applying the new rates to the average consumption per connection per month.

Collection Efficiency. The ratio of the actual collections to the collection target. It is a measure of performance of the district in collection enforcement. Historical collection efficiency shall be derived from at least one year's data.

b. RECEIPTS. The total amount of cash collections of the water district and consists of the following:

(1) Current Water Sales. The revenues from billed water. This is billed water multiplied by effective rate multiplied by collection efficiency.
(2) Collection of Previous Years' Arrears. This is computed as a percentage of water sales.

(3) Other Receipts. The cash collections from all other sources of funds, computed as current water sales multiplied by the historical percentage

(4) Total Cash Receipts. The summation of current water sales, collection of previous years' arrears, and other receipts.

c. DISBURSEMENTS. The total amount allocated for expenditures and comprises the following:

A. Operating and Maintenance (O&M) Expenses

(1) Salaries. The number of employees multiplied by the average salary per month multiplied by thirteen months.

(2) Power/Pumping Cost. Total production (cum) multiplied by the power or pumping cost per cubic meter produced.

(3) Chemical Cost. Production (cum) multiplied by the historical chemical cost per cubic meter produced multiplied by the escalation factor.

(4) Other O & M. Average served connections multiplied by other O&M cost per connection times 12 months.

(B) Debt Service. For payment of amortization for the loans availed from LWUA and other creditors comprising of current billings and settlement of arrears.

(C) Equity Contribution. The percentage of equity on total project cost or the absolute amount required from the District as counterpart to LWUA's financing.

(D) Capital Expenditures (Capex). For capital outlay to finance the cost of (a) tapping of new service connections, (b) NRW reduction if a Program of Work for the purpose is required, (c) Projects which will allow the WD to continue tapping new connections in cases where design year connections have been reached.

(E) Reserves. A standard entry in the cash flow projection, the amount to be disposed of according to particular priorities, usually 3% to 10% of total receipts. Cash disbursements not specifically mentioned above are classed in this group.

(F) Tax Provision. Thirty four percent (34%) of the projected Net Income after Interest Charges for Corporate Income Tax, and Franchise Tax computed at 2% of Gross Revenues.

d. TOTAL DISBUSEMENTS. The summation of all amounts allocated for expenditures.

e. CASH INFLOW (DEFICIT) Cash deficits (disbursements being greater than receipts) shall not be allowed for more than two consecutive years.

f. BEGINNING CASH BALANCE. Actual cash/funds balance free of customer deposits, loan and reserve funds

g. ENDING CASH BALANCE. The projected cash position of the District.

h. WATER RATES. Assists the evaluator in determining whether the periodic rate levels are sufficient to support the cash requirements. Care should be taken to ensure that the rate schedules are placed under the appropriate columns within the period of projection.

i. AVERAGE INCOME OF LOW INCOME GROUP & 5% MINIMUM CHARGE CEILING. For comparison, shows whether the rates (minimum charge) are within the capability of the low income group (LIG) to pay.

j. ASSUMPTIONS & JUSTIFICATIONS. Indicates the explanations relative to the data and information utilized in the projection. In making assumptions, reference should be made with the district's past data and experience in at least two years of prior operations, except in instances where the district is newly organized or where no data are available. In this case, reference could be made with appropriate industry averages.

A sample Cashflow Projection is shown in Figure 6-1.

3. COMPLIANCE TO MINIMUM STANDARDS

a. Water District (WD) Collection Efficiency or the ratio of current year collections to current year billings shall be at least 90%. All water rate increases shall be computed on the basis of this percentage or the actual and projected WD performance whichever is higher.

b. Non Revenue Water (NRW) shall not be more than 25%. In case the existing level of NRW is greater, a program of work (POW) for NRW reduction, including its required capital expense duly approved by the WD Board for implementation, shall be submitted. The POW shall not be longer than five years.

c. WDs with more than 1000 service connections shall have staffing ratio of not less than 1:120. Staffing for WDs with service connections of 1000 and below shall be as follows:

d. Salaries of WD personnel shall not be projected beyond the level prescribed in the Salary Standardization Law (SSL). In case the SSL level has been reached, salary increases may be allowed only for merit reasons and when legislated.

e. Benefits and allowances of WD personnel subject to government regulation shall be limited to that which are allowed. These include representation, extraordinary, miscellaneous expenses and the like.

f. Capital expenditures shall give priority to: (1) NRW reduction, (2) service connection growth, and (3) source development.

g. For consistency in cash flow projections, inflation and escalation rates shall be as determined by NEDA.