Asset Management: A Financial Perspective

Transcription

1 2008 ACWA Spring Conference & Exposition, Monterey, CA May 7, 2008 Asset Management: A Financial Perspective Presented by: Robert S. Grantham, Sr. PM, FCS GROUP Ed Cebron, Principal, FCS GROUP 225 Bush St., Suite 1825 San Francisco, California

2 Presentation Outline Asset Management Concepts and Benefits Long-Term Financial Planning 2

3 Asset Management Concepts 3

4 General Accountability Office 4

5 Strategic Asset Management Information Technology Planning Operations & Maintenance Integrated Asset Management Plan Administration Capital Improvement Program Finance Source: Carollo Engineers 5

6 Key Questions for Each What kind of agency do we want to be? What are our assets? Where are they located? Agency What condition are they in? Remaining useful life? Value? Are they 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? 6

7 What Is Your Organization s Mission? Plan, manage and operate a safe, reliable water supply and wastewater reclamation system and provide efficient, high quality customer service to Scottsdale citizens. City of Scottsdale, AZ 7

8 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 8

9 Asset Management Approach Project prioritization based on Risk Level of service objectives Asset conditions Financial feasibility Strategic Planning 9

10 Key Objectives of Our Clients Best business practices Cost saving Spending optimization Project prioritization Effective and responsible utility administration Improving or maintaining a reliable level of service Decision making/communication tool Long-term strategic vision 10

11 Benefits of Asset Management Improved risk management Improved capital & financial planning Increase asset lives & reliability Improved stewardship, accountability, and communication Decision making tool Operations & Maintenance Information Technology Engineering/ CIP Strategic Integrated Asset Management Plan Planning Finance Administration 11

12 Infrastructure Needs 12

13 Evaluation Criteria What criteria are most important to identify future R&R projects? Risk Condition Evaluated remaining useful life Economic remaining useful life Frequency of repairs Replacement/repair cost Future regulatory requirements 13

14 Key Metrics Identified improvements Potential future regulatory requirements Operational improvements Coordination with other divisions and departments Established cost-benefits objectives Risk 14

15 Asset Risk Risk = Criticality x Vulnerability Criticality: Consequence of asset failure Vulnerability: Likelihood of asset failure Assessment will define condition (vulnerability) 15

16 Asset Useful Life Actual Condition Rehab CONDITION Straight Line Depreciation Reconstruct 0 TIME T1 T2 T3 16

17 Valve Replacement 17

18 Pump Volute 18

19 Wastewater Pipeline Inspection CCTV Inspection Highlights: Overall VCP pipeline is in good condition. No immediate rehabilitation or pipeline replacement identified. Small presence of longitudinal and spiral cracks. Small presence of root infiltration. Trickling flow infiltrating from canal. Stretch 3 CCTV inspections still in progress.

20 Manhole Inspection Manhole Inspection Highlights: Overall manholes are in good condition. 18 manholes inspected. No immediate rehabilitation or manhole replacement identified. Recommended replacement of manhole frames and covers coordinated with future road repair.

21 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 21

22 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) All other pipes are grouped into service zones

23 Capital Financing

24 Capital Funding Sources Rates Capital facility charges Capital reserves Grants Debt Developer contributions Public private partnerships 24

25 Capital Funding Sources Rates Capital facility charges Capital reserves Grants Debt Developer contributions Public private partnerships 25

26 Identifying appropriate levels of accumulated cash and designating discrete purposes for those fund balances Setting Reserve Targets

27 Types of Financial Reserves Operating Reserves: Capital Reserves: System expansion System rehabilitation & replacement ( R&R ) Capital contingency Special Reserves: 27

28 Capital Reserves Identifying future system needs and using cashfunding as one part of a financial strategy to best accomplish or address those needs

29 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 Establish a purpose for seemingly surplus fund balances Define Benchmarks for evaluating fund balances 29

30 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 Relationship of maintenance and longevity 30

31 System R&R (cont.) Intentionally set rates/fees to collect additional revenues specifically intended to fund the R&R reserve Capital reinvestment contribution A level annual contribution to the R&R reserve Approaches to funding the reserve: Depreciation funding Minimum level that all systems should target Sinking fund contributions Annual reserve contribution based on estimated or specifically-identified needs 31

32 System R&R (cont.) Contributions in excess of needs creates accumulations in the the sinking fund. You You can can expect expect to see to see a sinking a sinking fund fund curve curve that that is is similar similar in shape in shape to the to the needs needs curve curve only only steeper. steeper. $400,000 $4,000,000 Pipe/Mains Needs versus Funding $2,000,000 $20,000,000 R&R Sinking Fund $300,000 $3,000,000 $1,500,000 $15,000,000 $1,000,000 $10,000,000 $200,000 $2,000,000 $500,000 $5,000,000 $100,000 $1,000, $ 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. 32

33 System R&R (cont.) 100% 80% 60% Capital Capital Funding Percentages Mix With Debt, RR & Cash Funding Debt Funding R&R Funding 40% Current Rate Funding Current Rate Funding 20% 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. 33

34 Reserve Management

35 Elements of Reserve Management Strategy Define Reserve Management Guidelines: Process and definitions for sources and uses Define benchmarks for accumulated fund balances Near-term capital needs Annual funding level Long-term replacement liability Define exceptions process for extraordinary events Define Rate Strategy for capital formation Good reserve management helps to stabilize rates Funding can adapt to changing financial and system circumstances 35

36 Impacts of Well-Crafted Reserves Lowers undesignated, potentially controversial, cash balances and identifies needs-based uses for cash Enhances prudent and timely system investments to preserve infrastructure and maintain efficiency Allows rates to be less conservatively set Helps to stabilize rates Increases ability to continue full operations despite shortterm or temporary financial fluctuations 36

37 Use of Debt 37

38 Role of Debt in Asset Management A strategy incorporating debt utilization has advantages including: Reduces rate requirements Provides a safeguard against overfunding Provides flexibility to manage ebb and flow of system needs Provides an element of generational rate equity Enables efficient market access Possible disadvantages include: Debt imposes long-term rate requirements that can interfere with long-term funding needs Debt issuance can impose rate impacts Use of debt can be viewed as a program failure 38

39 San Francisco 225 Bush St., Suite 1825 San Francisco, CA Seattle th Ave NE Suite D-215 Redmond, WA Portland SE Johnson Rd Suite 205 Milwaukie, OR