Asset Management: A Financial
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Asset Management: A Financial Asset Management: A Financial Presentation Transcript

  • 2010 Washington Association of Sewer and A i ti fS d Water Districts Conference April 21, 2010 21 Asset Management: A Financial Perspective Presented by: Robert S. Grantham, FCS GROUP 7525 166th Ave NE, Suite D215 Redmond, WA 98052 425.867.1802 www.fcsgroup.com
  • Presentation Outline Asset Management Concepts and Benefits Long-Term Financial Pl L T F l Planning Page 2
  • Asset Management Concepts Page 3 View slide
  • Strategic Asset Management Information Technology Planning Integrated Operations Asset Administration & Maintenance Management Management Plan Capital Improvement Finance Program Page 4 View slide
  • Key Questions for Each Agency What kind of agency do we want to be? What Wh t are our assets? Where are th located? t ? Wh they l t d? What condition are they in? Remaining useful life? Value? Are assets performing at required levels of service? What is the most cost effective repair/replacement/retirement strategy? What level of risk are we willing to accept? How are we planning to fund these capital needs? H l i f d h i l d? Page 5
  • What Is Your Organization’s Mission? Organization s “Plan, manage and operate a safe, reliable water supply and wastewater reclamation system and provide efficient, high quality y p g q y customer service to Scottsdale citizens.” City of Scottsdale, AZ Page 6
  • Current Approach How do you currently identify R&R projects? How do you determine whether to implement an improvement project rather than a replacement project? How do you decide when to replace assets? How do you determine expected costs? Institutional Knowledge Page 7
  • Asset Management Approach Project prioritization based on… Risk Level of service objectives Asset conditions Financial feasibility Strategic Planning Page 8
  • Benefits of Asset Management Improved risk p management Improved capital & Information Planning financial planning Technology gy Increase asset lives & reliability Operations & Maintenance Integrated Asset A Administration Management Improved stewardship, Plan accountability, and communication i i Engineering/ CIP Finance Decision making tool Page 9
  • Key Objectives of Our Clients Best business practices Cost saving Spending optimization Project p j prioritization Effective and responsible utility administration Improving or maintaining a reliable level of service p g g Decision making/communication tool Long-term strategic vision g g Page 10
  • Infrastructure Needs Page 11
  • Setting Your Objectives Identify need for improvements Potential future regulatory requirements Operational improvements Coordinate with other divisions and departments Establish cost-benefits objectives Page 12
  • Evaluation Criteria What criteria are most important to identify future R&R projects? y p j Risk Condition Evaluated remaining useful life Economic remaining useful life Frequency of repairs Replacement/repair cost R l / Future regulatory requirements Page 13
  • Asset Risk Risk = Criticality x Vulnerability Criticality: Consequence of asset failure Vulnerability: Likelihood of asset failure Assessment will define condition (vulnerability) Page 14
  • Asset Useful Life Actual Condition Rehab Reconstruct Straight Line p Depreciation Page 15
  • Valve Replacement Page 16
  • Pump Volute Page 17
  • Wastewater Pipeline Inspection CCTV Inspection Highlights: g g Overall VCP pipeline is in good condition. No immediate rehabilitation or pipeline replacement identified. Small presence of longitudinal and spiral cracks. d i l k Small presence of root infiltration. Trickling flow infiltrating f T i kli fl i fil i from canal. Stretch 3 CCTV inspections still in progress progress. Page 18
  • Manhole Inspection Manhole Inspection Highlights: g g Overall manholes are in good condition. 18 manholes inspected. p No immediate rehabilitation or manhole replacement identified. Recommended replacement of manhole frames and covers coordinated with future road repair. repair Page 19
  • Grouping Capital Projects From a financial and management perspective, groups projects where possible Easier to communicate (clear message) Easier to budget Facilitates bonding/borrowing Provides a roadmap for “ongoing” capital improvement programs Page 20
  • Water and Wastewater Pipelines Hydraulic models can be used to define criticality of pipe segments and service zones Identify “most critical pipe segments” (ex. top 10) p ) All other pipes are grouped into service zones Page 21
  • Capital Financing Page 22
  • Capital Funding Sources Rates R Capital facility charges Capital reserves Grants Debt Developer contributions Public private partnerships Page 23
  • Reserves…What Are We Talking About? Fund balances The Th cash a utility and/or agency has on-hand h l d/ h h d The cash used when revenues are not sufficient in meeting expenses The cash being saved for future needs Page 24
  • Setting Reserve Targets Identifying appropriate levels of accumulated cash and designating discrete purposes for those fund balances Page 25
  • Types of Financial Reserves Operating Reserves: Working capital Operating contingency Plant emergency Capital Reserves: System expansion System rehabilitation & y replacement (“R&R”) Capital contingency Special Reserves: Debt/Bond Rate stabilization Page 26
  • Capital Reserves Identifying future system needs and using cash-funding as one part of a financial h f di f fi i l strategy to best accomplish or address those needs Page 27
  • Key Policy Objective: Isolate & Protect Capital Resources Ensure timely and appropriate use of debt proceeds Provide funding for upgrades, expansion, and extension of the system Provide a designated resource for ongoing or future system replacement l Establish a purpose for seemingly “surplus” fund balances Reserve t R targets are based on policy direction and/or specific t b d li di ti d/ ifi needs Page 28
  • System R&R Provides a resource for ongoing repair, replacement, and rehabilitation of the system Duty to serve outlives the life of existing infrastructure As utility system age, replacement can become a large component of capital needs: Largely contributed systems Escalating costs and increasing complexity and regulation l ti Relationship of maintenance and longevity Page 29
  • System R&R (cont.) Intentionally set rates/fees to collect additional revenues specifically intended to fund the R&R reserve p y “Capital reinvestment” contribution A level annual contribution to the R&R reserve Approaches to funding the reserve: A h f di h Depreciation funding Minimum level that all systems should target y g Sinking fund contributions Annual reserve contribution based on estimated or specifically- identified needs Page 30
  • System R&R (cont.) Contributions in Contributions in excess of needs creates excess of needs creates accumulations in the You can expect to see a sinking fund curve that is You can expect to see a sinking fund curve that is similar in shape the sinking fund. accumulations in the the sinking fund. similar in shape to the needs curve only steeper. to the needs curve only steepersteeper. Pipe/Mains Needs versus Funding Pipe/Mains Needs versus Funding R&R Sinking Fund R&R Sinking Fund $400,000 $4,000,000 $20,000,000 $2,000,000 $15,000,000 $1,500,000 $300,000 $3,000,000 $10,000,000 $1,000,000 $200,000 $2,000,000 $500,000 $500 000 $5,000,000 $5 000 000 $100,000 $1,000,000 $- 2004 2013 2018 2026 2034 2042 2050 2058 2066 2081 2007 2010 2021 2029 2037 2045 2053 2061 2069 2078 2007 2013 2021 2029 2037 2045 2053 2061 2069 2081 2004 2010 2018 2026 2034 2042 2050 2058 2066 2078 Needs peak and taper off but funding is The sinking fund balance peaks as provided on a uniform basis. The contributions are made in the early contribution in excess of needs is years in excess of needs and then deposited to the sinking fund. declines in the later years as withdrawals are made in excess of contributions. Page 31
  • System R&R (cont.) Capital Funding Mix Capital Funding Percentages With Debt, RR &C h Funding Wi h D b RR & Cashh F di With Debt, D bt C F Cash Funding di 100% 100% Debt Funding Debt Funding 80% 80% 60% 60% R&R F di Funding R&R Funding 40% 40% Current Rate Funding Current Rate Funding 20% 20% 0% 0% The R&R fund is only intended to fund the peak spending as a mechanism to keep rates from spiking when the needs peak. Page 32
  • Reserve Management Page 33
  • Impacts of Well-Crafted Reserves Well Crafted Lowers undesignated, potentially controversial, cash balances and identifies needs-based uses for cash Allows rates to be less conservatively set Rates should be set based on average-year conditions Monitor conservation, as it impacts revenues: Is it a short-term or permanent shift? Good G d reserve management helps to stabilize rates t h l t t bili t Increases ability to continue full operations despite short- term or temporary financial fluctuations p y Page 34
  • Use of Debt Page 35
  • California Washington W hi t Oregon O 225 Bush St., 7525 166th Ave NE 4380 SW Macadam Ave Suite 1825 Suite D-215 Suite 220 San Francisco, CA 94104 Redmond, WA 98052 R d d Portland, P l d OR 97239 415-445-8947 425-867-1802 503-841-6543 Robert S. Grantham, 415-990-9924 Edward Cebron, 425-867-1802 www.fcsgroup.com Page 36