Asset Management: A Financial

2010 Washington A i ti f S d Association of Sewer and

Water Districts Conference

Asset Management: A Financial April 21 2010 Asset Management: A Financial Perspective

April 21, 2010

Presented by: Robert S. Grantham, FCS GROUP

7525 166th Ave NE, Suite D215 Redmond, WA 98052425.867.1802 www.fcsgroup.com

Presentation OutlinePresentation OutlineAsset Management Concepts and Benefits

L T F l PlLong-Term Financial Planning

Asset Management Asset Management Concepts

Strategic Asset ManagementStrategic Asset Management

InformationTechnology Planning

Operations& Maintenance

IntegratedAsset

IntegratedAsset Administration

ManagementPlan

ManagementPlan

Capital ImprovementProgram

Finance

Key Questions for Each AgencyKey Questions for Each AgencyWhat kind of agency do we want to be?

Wh t t ? Wh th l t d?What are our assets? Where are they located?

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?repair/replacement/retirement strategy?

What level of risk are we willing to accept?

H l i f d h i l d ?How are we planning to fund these capital needs?

What Is Your Organization’s Mission?What Is Your Organization s Mission?“Plan, manage and operate a safe, reliable water supply and wastewater reclamation system and provide efficient, high quality y p g q ycustomer service to Scottsdale citizens.”

City of Scottsdale, AZ

Current ApproachCurrent ApproachHow do you currently identify R&R projects?How do you determine whether to implement an 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

Institutional Knowledge

Asset Management ApproachAsset Management ApproachProject prioritization based on…

RiskRiskLevel of service objectivesAsset conditionsFinancial feasibility

Strategic Planning

Strategic Planning

Benefits of Asset ManagementBenefits of Asset Management

Improved risk

InformationTechnology Planning

pmanagement

Improved capital & financial planning gy

OperationsIntegratedIntegrated

A

financial planning

Increase asset lives & reliability Operations

& Maintenance Asset Management

Plan

Asset Management

Plan

Administrationreliability

Improved stewardship, accountability, and

i i Engineering/CIP Finance

communication

Decision making tool

Key Objectives of Our ClientsKey Objectives of Our Clients

Best business practices Cost savingCost savingSpending optimizationProject prioritizationj p

Effective and responsible utility administrationImproving or maintaining a reliable level of service p g g

Decision making/communication toolLong-term strategic visiong g

Infrastructure Infrastructure Needs

Setting Your ObjectivesSetting Your Objectives

Identify need for improvementsPotential future regulatory requirementsPotential future regulatory requirementsOperational improvements

Coordinate with other divisions and departmentsCoordinate with other divisions and departmentsEstablish cost-benefits objectives

Evaluation CriteriaEvaluation CriteriaWhat criteria are most important to identify future R&R projects?y p j

RiskConditionEvaluated remaining useful lifeEvaluated remaining useful lifeEconomic remaining useful lifeFrequency of repairsR l / Replacement/repair costFuture regulatory requirements

Asset RiskAsset Risk

Risk = Criticality x Vulnerability

Criticality: Consequence of asset failure

Vulnerability: Likelihood of asset failureVulnerability: Likelihood of asset failure

Assessment will define condition (vulnerability)

Asset Useful LifeAsset Useful Life

Actual Condition

Rehab

Straight LineDepreciation

Reconstruct

p

Valve ReplacementValve Replacement

Pump VolutePump Volute

Wastewater Pipeline InspectionWastewater Pipeline InspectionCCTV Inspection Highlights:g gOverall VCP pipeline is in good condition.

No immediate rehabilitation or pipeline replacement identified.

Small presence of longitudinal d i l kand spiral cracks.

Small presence of root infiltration.

T i kli fl i fil i f Trickling flow infiltrating from canal.

Stretch 3 CCTV inspections still in progress

still in progress.

Manhole InspectionManhole InspectionManhole Inspection Highlights:g gOverall 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 repairrepair.

Grouping Capital ProjectsGrouping Capital ProjectsFrom a financial and management perspective, groups projects where possibleprojects where possible

Easier to communicate (clear message)Easier to budgetFacilitates bonding/borrowingProvides a roadmap for “ongoing” capital improvement programsprograms

Water and Wastewater PipelinesWater and Wastewater PipelinesHydraulic models can be used to define criticality of pipe segments and service zonesIdentify “most critical pipe segments” (ex. top 10)p )All other pipes are grouped into service zoneszones

Capital Financing

Capital Funding SourcesCapital Funding Sources

RRatesCapital facility charges

Capital reservesCapital reservesGrantsDebt

Developer contributionsPublic private partnerships

Reserves…What Are We Talking About?Reserves…What Are We Talking About?Fund balances

Th h l d/ h h dThe cash a utility and/or agency has on-hand

The cash used when revenues are not sufficient in meeting expenses

The cash being saved for future needs

Setting Reserve TargetsSetting Reserve TargetsIdentifying appropriate levels of accumulated cash and designating discrete purposes for those fund balances

Types of Financial ReservesTypes of Financial ReservesOperating Reserves:

Working capitalOperating contingencyPlant emergency

Capital Reserves:Capital Reserves:System expansionSystem rehabilitation & yreplacement (“R&R”)Capital contingency

Special Reserves:Special Reserves:Debt/BondRate stabilization

Capital ReservesCapital Reserves

Identifying future system needs and using h f di f fi i l cash-funding as one part of a financial

strategy to best accomplish or address those needs

Key Policy Objective: Isolate & Protect Capital ResourcesIsolate & Protect Capital Resources

Ensure timely and appropriate use of debt proceeds

Provide funding for upgrades, expansion, and extension of the Provide funding for upgrades, expansion, and extension of the system

Provide a designated resource for ongoing or future system lreplacement

Establish a purpose for seemingly “surplus” fund balances

R t t b d li di ti d/ ifi Reserve targets are based on policy direction and/or specific needs

System R&RSystem R&R

Provides a resource for ongoing repair, replacement, and rehabilitation of the systemrehabilitation of the system

Duty to serve outlives the life of existing infrastructureinfrastructureAs utility system age, replacement can become a large component of capital needs:

Largely contributed systemsEscalating costs and increasing complexity and

l tiregulationRelationship of maintenance and longevity

System R&R (cont.)System R&R (cont.)Intentionally set rates/fees to collect additional revenues specifically intended to fund the R&R reservep y

“Capital reinvestment” contributionA level annual contribution to the R&R reserve

A h f di h Approaches to funding the reserve:Depreciation funding

Minimum level that all systems should targety gSinking fund contributions

Annual reserve contribution based on estimated or specifically-identified needs

System R&R (cont.)System R&R (cont.)

You can expect to see a sinking fund curve that is

similar in shape to the needs curve only steeper.

Contributions in excess of needs creates

accumulations in the the sinking fund.You can expect to see a sinking fund curve that is similar in shape

to the needs curve only steeper

Contributions in excess of needs creates accumulations in the the sinking fund.

$2,000,000

R&R Sinking Fund

$400,000

Pipe/Mains Needs versus Funding

to the needs curve only steeper.

$20,000,000

R&R Sinking Fund

$4,000,000

Pipe/Mains Needs versus Funding

$500 000

$1,000,000

$1,500,000

$200,000

$300,000

$5 000 000

$10,000,000

$15,000,000

$2,000,000

$3,000,000

$-

$500,000

2004 2010 2018 2026 2034 2042 2050 2058 2066 2078$100,000

2004 2010 2018 2026 2034 2042 2050 2058 2066 2078$-

$5,000,000

2007 2013 2021 2029 2037 2045 2053 2061 2069 2081$1,000,000

2007 2013 2021 2029 2037 2045 2053 2061 2069 2081

Needs peak and taper off but funding is provided on a uniform basis. The contribution in excess of needs is

deposited to the sinking fund.

The sinking fund balance peaks as contributions are made in the early years in excess of needs and then

declines in the later years as

withdrawals are made in excess of contributions.

System R&R (cont.)System R&R (cont.)

Capital Funding PercentagesWith D bt RR & C h F di

Capital Funding MixWi h D b RR & C h F diWith Debt, RR & Cash Funding

80%

100%

Debt Funding

R&R Funding

With Debt, RR & Cash Funding

80%

100%

Debt Funding

R&R F di

20%

40%

60%

Current Rate Funding

R&R Funding

20%

40%

60%

Current Rate Funding

R&R Funding

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.

Reserve Reserve Management

Impacts of Well-Crafted ReservesImpacts of Well Crafted ReservesLowers 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?

G d t h l t t bili tGood reserve management helps to stabilize rates

Increases ability to continue full operations despite short-term or temporary financial fluctuationsp y

Use of Debt

W hi t OCalifornia225 Bush St.,Suite 1825

Washington7525 166th Ave NE

Suite D-215R d d WA 98052

Oregon4380 SW Macadam Ave

Suite 220P l d OR 97239San Francisco, CA 94104

415-445-8947

Redmond, WA 98052425-867-1802

Portland, OR 97239503-841-6543

Robert S. Grantham, 415-990-9924Edward Cebron, 425-867-1802

www.fcsgroup.com

Asset Management: A Financial

Economy & Finance

Transcript of Asset Management: A Financial