Consider acceptance of Staff review of the Utility System Request for Information responses

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1 COUNCIL ACTION FORM NEW BUSINESS ITEM NO. 4 MEETING DATE: NOVEMBER 7, 2011 STAFF CONTACT: MELISSA MUNDT, ASSISTANT CITY ADMINISTRATOR / COMMUNITY DEVELOPMENT DIRECTOR Agenda Item: Department: Consider acceptance of Staff review of the Utility System Request for Information responses Administration Background/Description of Item: On August 1, 2011, the City Council authorized staff to issue a Request for Information (RFI) for firms that manage and operate publicly owned utility systems through Public-Private Partnership (P3) arrangements. The purpose of this RFI is to solicit more information about how a P3 arrangement might work and the potential benefits that it could offer the City of Gardner. A P3 arrangement is one of several options that can be considered. Currently, a committee is reviewing the possibility of combining the water and wastewater utilities with Gardner Electric and under a single oversight board. A third option to maintain the status quo and leave the water and wastewater utilities under Public Works with continued oversight by the City Council. Though not currently under discussion, a final option is divestiture of the City s utilities or some combination thereof. Staff published a notice for the RFI in The Gardner News and on the City s website and initially sent copies of the RFI to five interested parties. An additional firm requested copies of the RFI based on the published notices. On September 29, 2011, responses were received from Honeywell, InfraManagement Group (a Black & Veatch Company), People Service, Inc., and Alliance Water Resources. A Staff committee composed of Melissa Mundt, Laura Gourley, Jim Melvin, and David Greene reviewed the responses on October 24, Of the four responses, only InfraManagement Group fully responded to the RFI and demonstrated expertise in the management and operation of all three of the City s utility systems. Alliance and People Service did not demonstrate expertise in electric utilities nor did they address issues specifically requested in the RFI. Honeywell s response was directed to an energy audit and energy saving projects. Should Council wish to receive more information regarding the operation of a publicly owned utility system through a P3 arrangement, staff recommends that the InfraManagment Group be invited to provide a presentation at a Council work session. Of the four respondents to the RFI, InfraManagement Group was the only firm that fully responded to the RFI and the only firm with demonstrated expertise in all three of the City s utility systems.

2 The follow are the staff rankings of the RFI: PROPOSAL RANKING SHEET SCORING GUIDELINES Max Pts. 40 Point 30 Point 20 Point 10 Point Question Question Question Question Outstanding Good Average Marginal Inframanagement Group People Service Honeywell Alliance Project Approach: (40 Points) Experience & Background of Comparable Work (30 Pts.) Quality of Similar Work Provided (20 Points) Overall Responsiveness to RFP (10 Points) Extent of Applicable Resources Available to the Firm (10 Pts) TOTAL POINTS RANKING Staff Recommendation: Accept the Staff review of responses to the Utility System Request for Information and direct staff to schedule a presentation by InfraManagment Group at a Council Work Session.

3 2011 An Integrated Utility Model Alinda Capital Partners, LLC inframanagement Group, LLC 9/29/2011

4 Table of Contents Executive Summary... 1 Value for the City of Gardner... 2 Positioning for Sustained Economic Growth... 3 Respondent Team... 4 Principal Contact Information... 4 Contract Arrangement... 5 Overview of LTSA Structure... 6 Roles and Responsibilities... 8 Performance Based Compensation Arrangement Proposed Assets and Services Scope Employment Continuation for Current Utility Staff and Other Employee Considerations Contract Duration Renewal Terms Sharing of Risk Utility Management Approach Strategy and Benchmarking Regulatory Compliance Finding Synergies, Increasing Efficiency Energy Management Total Water Management Capital Improvement Program Delivery Process and Schedule Review of Kansas Law Conclusion Appendix I: Client References Appendix II: Management Experience Appendix III: Process Design and Engineering Experience Appendix IV: Project/Program Management Experience Appendix V: Public Private Partnerships and Financing Experience Appendix VI: Environmental Compliance and Sustainability Appendix VII: Associated Experience Appendix VIII: Local Capability in Kansas List of Tables Table 1 Roles and Responsibilities under Various Contracting Methods... 5 Table 2 Comparison of Current Risk Versus Risk under an LTSA List of Figures Figure 1 Long Term Service Agreement Model... 1 Figure 2 Utility Consolidation with LTSA... 6 Figure 3 Overview of Contractual Relationship under an LTSA... 7 Figure 4 Overview of City Management/Hierarchy with a Consolidated Utilities Board Figure 5 Preliminary Scope of Assets Managed Figure 6 Typical Elements of a PAS 55 Asset Management Framework Figure 7 High Level Schedule for Due Diligence and Transition Period (in weeks) img AND ALINDA Executive Summary City of Gardner RFI for Electric, Water and Wastewater Systems i

5 Executive Summary By issuing its Request for Information (RFI), the city of Gardner (City), has taken a strategic and proactive approach for balancing increasing infrastructure costs with the need to remain an affordable place to live and work. Rising costs and fiscal constraints are challenging municipalities across the United States, resulting in record levels of deferred infrastructure maintenance. Headlines point to ballooning deficits, bankruptcies and credit rating downgrades at all levels of government. Demographic trends indicate state and municipal governments will continue to face many tough financial trade offs over the coming decades. Public private partnerships can help governments bridge the gap between available capital and necessary capital expenditures. The inframanagement Group (img) and Alinda Capital Partners (Alinda), as a Team, are proposing a business arrangement based on a Long Term Services Agreement (LTSA). Under an LTSA, the City would assign the rights to manage, operate, maintain and improve its electric, water and wastewater systems to a Special Purpose Company (SPC) controlled by Alinda. For the purpose of this document, the SPC will be called the Gardner Utility Company (Company). The Team s solution would provide the City with an up front payment, estimated between $65 million and $75 million*. In addition, the Team would fund all capital improvements for the life of the agreement. In addition to the upfront payment, the proposed agreement would provide the City with the following benefits: Transfer of risk from the City related to utility systems operations and improvements. Retention of asset ownership. Funding for future capital improvements. Continuity of employment for current staff. Flexibility to smooth potential rate impacts. Performance based compensation model. Integrated electric, water and wastewater utility model. Figure 1 provides a graphical overview of the proposed commercial arrangement. Figure 1 Long Term Service Agreement Model *All figures are subject to due diligence img AND ALINDA Executive Summary City of Gardner RFI for Electric, Water and Wastewater Systems 1

6 Value for the City of Gardner Municipalities have many choices when it comes to engaging in Public Private Partnerships. The value of an LTSA extends well beyond short term objectives of obtaining access to capital and retirement of current utility debt. The following outlines many of the high level benefits the City could receive as a result of an LTSA. Immediate Access to Capital Among the numerous benefits of an LTSA, one of the most impactful for the City is immediate, upfront funding. Using the 2010 CAFR from the City and current utility rates, we estimate the City could receive an upfront cash payment between $65 million and $75 million.* Upfront Payment First 5 Year CIP Funding Immediate Access to Capital $65M $75M* $25M $35M* $90M $110M* Current data shows the City will be required to use approximately $44 million for the defeasement of its utility debt, leaving approximately $21 million to $31 million for use at the City s discretion. The Company will not require a reserve fund for its debt. Therefore, approximately $8 million dollars associated with the City s utility debt reserve should be released to the City for use in other areas. The LTSA solution is flexible, and alternatives to a lump sum payment may be available. During the due diligence period, we will discuss other options for structuring the upfront payment. Alternatives could include: Partial payment upfront followed by yearly revenue sharing. Revenue sharing. Payment used to fund the first five year capital program. These options will be modeled to assess any rate adjustment impacts or penalties associated with the defeasement of debt. See the Contract Arrangement section for additional details. Transfer of Risk from the City to the Company The LTSA would result in a significant transfer of risk from the City to the Company related to operations, maintenance, existing regulatory compliance, and capital improvements of electric water and wastewater systems. See the Sharing of Risk subsection for additional details. City Retains Ownership, Customer Interface and Rate Setting Under an LTSA, the City will continue to own all assets covered in the agreement. In addition, the City will maintain its current customer interface, collection, billing and rates setting, and third party contractual relationships for electricity supply, water and wastewater supply, and disposal contracts. The LTSA will have language in the contract to allow utility services to be transferred back to the City if desired. The terms and conditions will be subject to negotiation. See Contract Arrangement section for additional details. The City gains added value from the release of its utility debt reserve, approximately $8 million.* Funding for Capital Improvements According to City estimates, the electric, water and wastewater systems will require between $25 million and $35 million in capital expenditures within the next five years. Under an LTSA, the Company would *All figures are subject to due diligence img AND ALINDA Executive Summary City of Gardner RFI for Electric, Water and Wastewater Systems 2

7 fund all capital improvements over the life of the agreement on a rolling, five year capital improvement program (CIP) planning basis. Capital improvement investment is critical to maintaining Gardner s utility infrastructure systems. It is more cost effective to maintain and improve than replace or fix deteriorated assets. Continued deferred maintenance places the rate payers investment in the City s utility systems at risk. Continuity of Employment for Current Staff Under an LTSA, existing utility employees will be transferred to the Company. The Company will provide employee benefits similar to benefits currently provided by the City. The Team is dedicated to ensuring current employees remain whole during and after the transition process, particularly as this relates to transitioning from the Kansas Public Employees Retirement System (KPERS) to a 401k program. See Contract Arrangement section for additional details. Flexibility to Smooth Rate Impacts An LTSA provides a more flexible delivery model, through financing and utility optimization, to allow the Company to provide a mechanism for smoothing rate adjustments when compared to the City s traditional financing models. Rate smoothing helps the City be more competitive in its rate structure in a manner that promotes economic growth. Integrated Utility Management Management efficiency will be gained through synergies realized by an integrated management approach. This is achieved by implementing best practice asset management that links business planning and strategy, including a project delivery approach, to prioritize and execute capital delivery within budget and schedule. The approach will benefit the City by providing a clear roadmap of where investment is needed in order to improve asset performance and delivery of services to the City and its customers. In addition, it will provide a framework for continued enhancements and improvements for the duration of the agreement. Proven Approach The LTSA model, while unique to Johnson County, has been successfully implemented in other communities across the country. For more information, please see the Santa Paula, CA, and Cranston, RI, case studies within this document. Positioning for Sustained Economic Growth The significant cash infusion, relief of utility debt and release of utility debt reserve funds provides the City with a position of financial strength. A position of financial strength provides the City great flexibility in planning future budgets and taxes, and rolling back the Mill Levy rates, in addition to implementing additional infrastructure improvements (such as roads and bridges) for sustained economic development. An LTSA with the Team provides this opportunity to the City without sacrificing local ownership and customer interface of its electric, water and wastewater assets. *All figures are subject to due diligence img AND ALINDA Executive Summary City of Gardner RFI for Electric, Water and Wastewater Systems 3

8 Respondent Team The inframanagement Group img is a wholly owned subsidiary of Black & Veatch, a global engineering, consulting, construction and operations company headquartered in Overland Park, KS. img is a local asset management company that works with private infrastructure fund partners who have an interest in long term, public private partnerships with municipal electric, water and wastewater assets. As a subsidiary of Black & Veatch, img has nearly 100 years of energy and water experience in Kansas behind it, with capabilities to optimize the performance of electric, water and wastewater assets. The company has access to world renowned capabilities and best practices related to the planning, development, construction and management of electric, water and wastewater systems. Black & Veatch, img s parent company, employs approximately 3,000 professionals in Johnson County, including Gardner residents. The company has supported more than $2 billion in infrastructure development and improvements in Kansas. The company has also pledged to invest $1 million in the Kansas university system for research and development. Alinda Capital Partners Alinda is an independent, private investment firm. The company owns both energy and water assets in the United States and has no affiliations with any banking or industrial group. Alinda Capital Partners owns both energy and water assets in the United States and other parts of the world. One of Alinda s assets is South Staffordshire Water whose customers bills are 25 percent lower than the industry average. Alinda currently has ownership interests in airports, roads, rail, gas pipelines and utilities, and water supply and wastewater treatment systems, as well as other infrastructure assets that provide essential services to communities across North America and Europe. See the Appendices for additional information on the Team s qualifications, experience and client references. Principal Contact Information inframanagement Group Bruce Allender Chief Operating Officer Lamar Ave. Overland Park, KS AllenderBM@infraManagementGroup.com img AND ALINDA Executive Summary City of Gardner RFI for Electric, Water and Wastewater Systems 4

9 Contract Arrangement The following outlines common forms of third party contractual arrangements. Table 1 provides a comparison of these methods related to stated City objectives. Privatization involves the sale of asset(s) to a private company. With privatization, the City would lose control of its critical assets. The Team believes that the sale of water and wastewater assets would also require a legislative change from the state. Operations and maintenance outsourcing, while common in the United States, provides limited risk transfer and little financial impact for the City over the contract life. Long Term Services Agreements allow asset ownership; water rights; customer interface; billing; rate setting; third party electric, water and wastewater supply; and disposal contracts to remain with the City. The Team would provide an upfront payment for the right to provide utility services to the City. The Team would be responsible for capital delivery and funding, operations and maintenance (O&M) of the assets and existing regulatory compliance for the asset. Table 1 provides an overview of the roles and responsibilities associated with utility assets under each contract arrangement described. Table 1 Roles and Responsibilities under Various Contracting Methods Capital Improvement Program Asset Management Customer Interface CLASSIFICATION Design Build Costs Schedule Completion Construction Warranties Quality / Performance Capital Replacement EXISTING RESPONSIBILITIES PRIVATIZATION O&M OUTSOURCING LTSA City Private Company City LTSA Partner City Private Company City LTSA Partner City Private Company City LTSA Partner City Private Company Contractor LTSA Partner City Private Company City LTSA Partner Commodity City Private Company City for Commodity Costs / Contractor for Quantity City for Commodity Cost / Company for Quantity* Planning City Private Company Contractor City and LTSA Partner Life Cycle Costs City Private Company City LTSA Partner O&M City Private Company Contractor LTSA Partner City Private Company City City Ownership City Private Company City City Rate Control City Private Company City City Financing Long Term Financing City Private Company City LTSA Partner Interest Rate City Private Company City LTSA Partner *Note: Quantity for water and wastewater systems img AND ALINDA Contract Arrangement City of Gardner RFI for Electric, Water and Wastewater Systems 5

10 Based on stated City objectives to develop alternative financing solutions for infrastructure improvements, as well as risk sharing/transferring related to City owned infrastructure, the Team recommends the LTSA model. Case Study: City of Santa Paula, California CHALLENGE Existing facilities did not comply with current state environmental requirements. City had accumulated nearly $8 million in fines as a result of noncompliance. City did not have access to capital to fund construction of a new facility within the regulatory timeframe. SOLUTION A Design Build Finance Operate model with Alinda Capital Partners. Project was 100 percent financed using private funds. Risk transferred to private party building and operating the facility. RESULTS Fines assessed to the City were waived when facility began operations ahead of schedule. City had no upfront costs and now pays a monthly service fee for services provided by the facility. Assets will be transferred to the City after 30 years at no additional cost. We had to build a new wastewater treatment facility, and we did not have the necessary funds. The public private partnership gave the City a lot more latitude and the risk was transferred to the company who was doing the work. Santa Paula Vice Mayor Bob Gonzales In addition, the Team recommends the City create a consolidated utilities board from the existing Electric Utility Board (EUB) to administer the LTSA contract and services not transferred to the Team (e.g., customer billing and collections). While the City could realize operational efficiencies through the consolidation of its utilities under a single utility board, it would not obtain the alternative financing resources stated as a primary objective within the RFI. Through an LTSA, the City will be able to meet all of its stated objectives. See Figure LTSA Figure 2 3 Utility Consolidation Streamlined Management & Operations Risk Transfer Upfront Payment & Access to Capital Utility Consolidation with LTSA Overview of LTSA Structure The LTSA is a business arrangement in which the City would enter into a long term agreement with the Company that is controlled by Alinda and managed by img. The Company will manage the City s electric, water and wastewater systems and subsequently provide those services back to the City. Figure 3 provides an overview of the contractual relationship between the Team and the City under an LTSA. By entering into an LTSA, the City will unlock significant monetary value from its utility assets that can be used immediately by the City for other needs. The city of Santa Paula, CA, provides an example of the value of public private partnerships through an LTSA. img AND ALINDA Contract Arrangement City of Gardner RFI for Electric, Water and Wastewater Systems 6

11 Upon financial close of the LTSA, the City would receive an upfront payment (estimated to be between $65 million and $75 million*) from the Company for the right to provide utility services to the City for the duration of the agreement. The City would then make a monthly payment to the Company consisting of fixed and variable components that are agreed upon on an annual basis. In addition to the upfront payment, the proposed agreement would provide the City with the following benefits: Transfer of risk from the City related to utility systems operations and improvements. Retention of asset ownership. Funding for future capital improvements. Continuity of employment for current staff. Flexibility to smooth potential rate impacts. Performance based compensation model. Integrated electric, water and wastewater utility model. During the due diligence period, the Team will discuss and model other options for structuring the upfront payment to avoid any potential penalties associated with the defeasement of the City s utility bond debt and determine any rate adjustment impacts or penalties. Alternatives could include the following: Partial payment upfront followed by yearly revenue sharing. Revenue sharing. Payment used to fund the first five year capital program. Figure 3 Overview of Contractual Relationship under an LTSA Alinda and img will create a Special Purpose Company (Company) for the management of the City s utility assets. Alinda will control the Company, provide the upfront payment and finance capital improvement programs. Day to day operations and maintenance, CIP implementation and oversight will be managed by img. img AND ALINDA Contract Arrangement City of Gardner RFI for Electric, Water and Wastewater Systems 7

12 Following the due diligence period, the LTSA will include specific details for the following: Agreed upfront payment (or alternative solution). Agreed upon fee the City would pay for electric, water and wastewater services. Shared services agreement with the City to provide City services using current utility staff (e.g., snow removal and street maintenance). Agreement (at financial close) to transition existing utility staff to the Company. Agreement on the initial, five year CIP and a methodology on how rolling five year CIPs will be agreed upon for the life of the contract. Agreement on Key Performance Indicators (KPI) by which the Company will be reviewed on an annual basis. Example KPIs include the following: Availability of assets to provide services to the City. Energy and chemical usage. Water quality. Safety and system performance. Response times for customer outage calls. Reporting. Agreed upon condition of electric, water and wastewater assets to be turned over to the City when the LTSA expires. End of contract transfer provisions payment. Early termination parameters. NOTE: The list above is not intended to be exhaustive, but rather provides an overview of the agreement. Roles and Responsibilities The following provides a preliminary highlevel overview of roles and responsibilities under an LTSA. The services agreement will clearly outline the roles and responsibilities of each party when finalized. City of Gardner Revise the EUB s charter to create a consolidated utilities board that oversees the delivery of electric, water and wastewater services to the City and its customers. Review and recommend utility rate adjustments to the City Council. Provide input to the Company in long term planning of utility services for the City. Continue billing and collecting from customers for utility services. Provide input and approval of service agreement adjustment to implement the five year rolling CIP. Approve monthly invoices from the Company and conduct an annual audit of services against KPIs. Monitor compliance with service obligation of the LTSA NOTE: The LTSA enables the City to maintain its Power Purchase Agreements and Water Supply Contracts. In addition, according to our initial legal opinion from Polsinelli Shughart, the City s Power Sharing Agreement through KMEA should not be affected as a result of entering into an LTSA because the City will maintain ownership of the assets. Team Ownership of the Company. Develop and execute a capital structure that incorporates a debt financing plan for funding, if required. img AND ALINDA Contract Arrangement City of Gardner RFI for Electric, Water and Wastewater Systems 8

13 Prepare, review, approve and implement the annual major maintenance schedule and the five year CIP. Coordinate review of strategy planning of the utility with the City. Approve annual asset management budget. Develop and approve the annual O&M budget. Conduct regular meetings with the City. Manage the day to day operations and maintenance activities of utility assets. Assist with the transition of contracts, permits and other documentation relating to the facilities from the City to the Company. Transfer current City utility employees to the Company to operate and maintain the assets. Manage performance improvement initiatives with respect to the utility O&M budget. Manage inventories in accordance with the O&M budget. Manage equipment warranties. Manage safety program. Identify technical services requirements, including estimated costs and related benefits. Develop and manage risk programs. Produce monthly financial and other management reports for the City. Manage back office functions (e.g., Accounting, Procurement, Work Management, Outage Management, HR and Payroll, etc). the board to oversee and manage the LTSA. Under such an arrangement, responsibilities for the consolidated utilities board would include the following: Handle customer interface, billing, etc. Maintain day to day interface with the LTSA asset manager. Monitor compliance with the service obligations of the LTSA. Approve monthly invoices for payment by the City. Agree on the rolling five year CIP on an annual basis. Review and recommend any utility rate adjustments to the City Council. Evaluate performance of the Company against KPIs. The Team anticipates synergies and optimization as a result of a consolidated utilities approach. These synergies and optimization opportunities would be reflected in the initial base fee agreed upon with the City after due diligence of the systems is completed. Optimized asset management should result in smoothing of utility rates over the life of the LTSA, while providing current or improved service levels to the City. If structured correctly, there would be minimal overlap of responsibilities associated with the service and management of the City s utility assets. Figure 4 provides a high level overview of the City organization based on this approach. Public Utilities Board The LTSA provides the City with the opportunity to consolidate oversight of electric, water and wastewater services under the existing EUB. To do this, the charter for the EUB would need to be adjusted to allow img AND ALINDA Contract Arrangement City of Gardner RFI for Electric, Water and Wastewater Systems 9

14 Figure 4 Overview of City Management/Hierarchy with a Consolidated Utilities Board Performance Based Compensation Arrangement The performance based compensation structure to the City will combine the service fees from providing electric, water and wastewater services into one monthly bill from the Company. Each of these service fees will include the following: Base Fee: The repayment of the upfront payment to the City in addition to O&M and adjustments against agreed upon cost indexes (e.g., cost of living). Capital Improvement Fee: This fee incorporates the costs of capital improvements plus the cost of O&M associated with the improvements (charged at the time capital improvements are placed into service). Pass Through Costs: This includes normal operating commodity cost indexing in electricity, water and wastewater, in addition to incremental fuel costs for electricity. The fees outlined will be adjusted against agreed upon KPIs. If KPIs are not achieved, then pre determined, weighted penalties will apply to the monthly service payment. Proposed Assets and Services Scope It is anticipated that the assets and services scope responsibilities will be divided as shown on Figure 5. img AND ALINDA Contract Arrangement City of Gardner RFI for Electric, Water and Wastewater Systems 10

15 Figure 5 Preliminary Scope of Assets Managed Employment Continuation for Current Utility Staff and Other Employee Considerations Under the LTSA, employment of current utility staff would be continuous. Current utility employees would be transferred to the Company that would manage the day to day operations and CIP of the electric, water and wastewater assets. The Team is committed to ensuring current utility staff remain whole throughout the transition process. The Company will provide benefits similar to current benefits provided by the City. In addition, the Company will provide employees with a work environment that is safe (OSHA Standards), offer training, skills development and career growth opportunities while providing fair compensation for their efforts. The Company will provide current utility employees with training, skills development and career growth opportunities while providing fair compensation for their efforts. A key change for employees will be related to the type of retirement benefit offered. City employees currently participate in the KPERS program. Upon transition to the Company, this would change to a 401k program. During due diligence, a detailed, individual byindividual analysis would be performed in order to understand any impacts to employees as a result of migrating from the KPERS program to a 401k program. If there are negative impacts to an employee or employees, an equalizing solution would be developed. img AND ALINDA Contract Arrangement City of Gardner RFI for Electric, Water and Wastewater Systems 11

16 In addition to reviewing the retirement benefits, a compensation evaluation will also be completed to compare current wages to similar roles in other utilities across the region. Based on the results of this analysis, adjustments may be necessary. Contract Duration The proposed maximum length of the LTSA is 30 years, based on Kansas law. Renewal Terms The renewal terms will be agreed to in the LTSA; however, it is anticipated that the City will have options to renew the LTSA or have services revert back to the City. Sharing of Risk The LTSA will provide significant risk transfer from the City to the Company related to the operations, maintenance, compliance with existing regulatory requirements and capital improvements of the electricity, water and wastewater utilities. The Company would be responsible for ensuring the facility maintains compliance with existing state and federal regulations and continues to meet current permits associated with operations of the plant. The Company would also assume risks associated with capital improvement projects, including the potential for cost overruns. Table 2 provides an overview of risk under an LTSA. LTSA Case Study: City of Cranston, Rhode Island CHALLENGE Infrastructure upgrades were needed for wastewater treatment facility. City had limited options for obtaining capital due to unfavorable credit rating. SOLUTION A 25 year LTSA that provided the city with an upfront payment of $48 million. RESULTS City reduced existing debt and restored its credit worthiness. LTSA provided initial rate reduction for customers. LTSA guaranteed customers would not pay more for service between 1997 and 2022 than they would have paid if the City had continued to run the sewer system. City has received more than $75 million in savings from the contract, improving its regulatory and financial standing. img AND ALINDA Contract Arrangement City of Gardner RFI for Electric, Water and Wastewater Systems 12

17 Table 2 Comparison of Current Risk Versus Risk under an LTSA RESPONSIBILITY/RISK OPERATIONS CURRENT RISK RISK UNDER AN LTSA CITY CONTRACTOR CITY COMPANY Utility Performance Rate Setting Reporting Existing Regulatory Compliance Future Regulatory Compliance MAINTENANCE Planning Funding Repair LABOR Conflicts Agreements Funding Wages, Benefits and Pensions SAFETY Program Training Management CUSTOMER INTERFACE Billing Collections Meter Reading Customer Service CAPITAL IMPROVEMENTS Planning Prioritization Funding Scoping Contract Management Bid/RFP Management Change Orders Schedule Management Cost Overruns Startup Testing / Acceptance img AND ALINDA Contract Arrangement City of Gardner RFI for Electric, Water and Wastewater Systems 13

18 Utility Management Approach An integrated utility management approach will support the City s environmental, social and economic goals. An integrated utility operation will drive a strategic asset management program ensuring that electric, water and wastewater utility investment advances those goals. This will be accomplished by evaluating utility operations together, resulting in a prioritization of investment in capital and O&M activities across combined electric, water and wastewater utilities to best achieve the City s level of service goals. The Team will be compensated through performance of service to the City and realized saving through its utility management approach. The following are areas where the Team anticipates opportunities for synergies and optimization. This list is not comprehensive and all areas of the electric, water and wastewater utilities will be assessed during the due diligence period: Back office functions. Streamlined procurement. Alternative capital delivery implementation. Energy efficiency investments. Incorporation of PAS 55 asset management framework into existing management practices (see Figure 6). Coordinated scheduling and delivery of network field services. Under the LTSA, the Team would implement asset management best practices to obtain synergies, deliver on capital improvements and realize cost savings while meeting its service obligations to the City. To identify the areas for improvement and investment, the Team will benchmark the City s current asset management against industry best practices using a PAS 55 framework (see Figure 6). This approach was effectively implemented at Dwr Cymru Welsh Water, resulting in significant capital and operations savings. This asset management framework is commonly used across electric utilities worldwide. Throughout the transition period, img will look to incorporate its key operation strategies with the City s current practices to ensure consistency throughout the organization. The benefits of incorporating this framework approach include the following: Providing a clear link between capital improvement plans, business plans and each asset. Delivery of high reliability environment for operating efficiency, quality and safety. Meeting existing environmental, regulatory and legal compliance. Improved asset/service risk management against established benchmarks. Alignment or integration with other related management systems within a plan docheck act environment. Using an asset management framework and capital prioritization approach, Dwr Cymru Welsh Water, the national water company in Wales, was able to reduce capital expenditures by 20 percent, achieve operational savings exceeding 25 percent and moved from seventh to first place in regulatory compliance. As part of creating a comprehensive asset management system, the Team will work with the City s financial advisors to try to achieve higher bond ratings from rating agencies. This will be achieved by demonstrating a world class predictive asset management system that utilizes full cost accounting into asset renewal and extension img AND ALINDA Utility Management Approach City of Gardner RFI for Electric, Water and Wastewater Systems 14

19 and future capital needs that develop nearand long term goals to obtain the highest level bond ratings for the City. Successful implementation of an integrated electric, water and wastewater utility operations strategy will require a highperformance partnership between the Team and the City. This partnership must be chartered to ensure the team works together. Guaranteed performance and compliance with existing regulations. Improved asset/service risk management against established benchmarks. Coordination of enterprise wide utility operations to achieve synergies, improve service and reduce costs (e.g., energy optimization, shared IT/management systems). The benefits of the Team s asset management approach include the following: Figure 6 Typical Elements of a PAS 55 Asset Management Framework Strategy and Benchmarking Throughout the transition period, img will look to incorporate its operation strategies with the City s current practices to ensure consistency throughout the organization. The strategy will provide necessary planning and benchmarking to show where investment is needed to improve asset performance and service to the City. Part of the planning process is capital program definition, including capital prioritization for a five year rolling CIP that is agreed upon with the City. Once agreed, the CIP will be executed through a program management workflow model. This workflow model provides a framework to manage ongoing activities while achieving regulatory and program delivery management goals. The Team s strategic approach allows for risk and level of service impact based prioritization of maintenance, repair and replacement activities and capital investment across the combined suite of electric, water and wastewater assets, including the following: img AND ALINDA Utility Management Approach City of Gardner RFI for Electric, Water and Wastewater Systems 15

20 Prioritized funding and resource allocations across electric, water and wastewater assets to maximize the impact of customer service for maintenance, repair and replacement efforts. Capital prioritization to ensure that capital improvements to critical assets have capital allocated at the appropriate time. This partnership must be chartered to ensure the Team works together toward enterprisewide excellence in program management, business procedures and customer service to create a best for program decision making basis that generates win win outcomes for all participants. Regulatory Compliance As part of our utility management plan, the Team will meet regularly with EPA personnel and other regulatory agencies on legislation that could affect Gardner s electric, water and wastewater utilities. The Team has a long history of working with regulatory agencies in the state of Kansas to implement planning and strategies to meet regulatory compliance on behalf of its clients. Finding Synergies, Increasing Efficiency A number of tactics may prove useful for increasing efficiency through combined and coordinated electric, water and wastewater services. The Team anticipates synergies and optimization as a result of integrating the utilities under an LTSA. Many of the synergies and efficiencies will come from understanding the nexus of energy and water. Typical examples include the following: Energy management. Total water management. Capital improvement program delivery. Energy Management By consolidating management of water and wastewater operations, the Team can optimize energy management practices at these facilities. The Team will work to investigate potential long term energy optimization areas including the following: Basic energy efficiency improvements. Renewable energy and fuel cell use. Technology based upgrades that provide capital payback (e.g., energy efficient pumps) such upgrades could be funded by the Team and would not affect any rate base adjustment. The Team will investigate the potential for implementing the City s recent energy efficiency study on City owned assets as a starting point for this program. In addition, the Team will research opportunities for obtaining grant funds from the state for energy development. Case Study: Palmdale Water District Onsite Power Generation CHALLENGE Develop options for onsite self generation to alleviate high energy costs. SOLUTION Develop options around sustainability: economic, environment and community. Establish and evaluate economic factors such as state incentives for self generation. Recommended installation of a wind turbine. RESULTS One of the most cost effective net metered wind projects in California (based on published cost data). Wind turbine capacity expected to offset all energy use of the water facility and pay for the installation within 10 years. img AND ALINDA Utility Management Approach City of Gardner RFI for Electric, Water and Wastewater Systems 16

21 Total Water Management A combined utility operations strategy allows the City to better pursue a total water management approach, utilizing recycled water production and sales as a potential driver of future revenues and cost avoidance. This is accomplished through planning and optimizing any opportunity to provide recycled water to industries, including the following: Development of multi grade recycled water retail platform. Reduction of demand for potable water and treatment capacity, resulting in delay or elimination of supply and treatment capital expenditures. Water conservation based initiatives are essential to optimize treatment and network O&M activities. Addressing distribution system leaks, meter calibration and/or replacement, infiltration/inflow management and capacity management could achieve substantial near term cost savings and extend the life of the existing water supply and treatment expansions. A combined utility operations strategy allows the City to better pursue a total water management approach, utilizing recycled water production and sales as a potential driver of future revenues and cost avoidance. Capital Improvement Program Delivery The Team s model provides a program management umbrella that oversees and coordinates all work, providing project oversight and cross project functions. This model includes project cost and schedule controls, procurement, safety, quality and design standardization. Under this umbrella, project specific staff will be assigned to individual infrastructure improvement projects. The CIP model incorporates all forms of project delivery, including fast track, designbuild, construction management at risk and third party construction management. The bulk of the individual project delivery is assumed to be via some form of alternative delivery, to take advantage of the inherent benefits of a particular approach to meet individual project goals. Under the CIP model, the Team would evaluate each CIP project and determine the contracting methodology to best derive cost benefits for the program. In general, alternative project delivery with the use of a progressive design build model will provide the best options for cost savings. To accelerate specific types of specialty activities, such as find and fix assignments, Job Order Contracting can be used based on predetermined, unit price based contracts. For example, local pipeline installation firms could be contracted to quickly mobilize and provide repair and replacement services at a preapproved rate. This type of approach will create capital improvement savings and will create rate adjustment certainty for the City of each five year planning period for the City s customers. Process and Schedule If the Team is selected by the City, it will immediately move into due diligence. The following outlines significant milestones running from due diligence through transition of staff and assets: Due diligence. Negotiation of the Service Agreement. Integration planning. Financial close. Transition period. img AND ALINDA Utility Management Approach City of Gardner RFI for Electric, Water and Wastewater Systems 17

22 The outcome of the due diligence period will allow the Team to submit a commercial offer to the City that includes a firm figure for upfront monetization of City owned assets, service fee arrangement and a commitment to fund capital improvement for the first fiveyear capital planning period. The information gathered during the due diligence process will serve as a basis for further discussions with the City. The transition of the City s assets and staff would begin immediately after financial close and would continue for approximately 90 days. Figure 7 provides a proposed, highlevel schedule for the transition period. Figure 7 High Level Schedule for Due Diligence and Transition Period (in weeks) img AND ALINDA Utility Management Approach City of Gardner RFI for Electric, Water and Wastewater Systems 18

23 Review of Kansas Law The Team has conducted a preliminary legal analysis in regards to the transfer of upfront payment to the City s general fund and Kansas Cash Basis Law. The Team encourages the City to obtain its own legal opinion on these associated areas of Kansas law. Legalities Regarding Transfer of Upfront Payment to the City s General Fund A preliminary legal opinion from Husch Blackwell confirms that if the proposed transaction is structured correctly, transfer of the upfront payment to the City s general fund is possible. Kansas Cash Basis Law Consideration Polsinelli Shughart, one of the Top 100 law firms in the country according to the National Law Journal, has provided the following preliminary opinion regarding whether Kansas law would permit a private entity to enter into a lease leaseback arrangement with a Kansas municipality for the provision of electric, water and wastewater services: Based on previous Attorney General Opinions and various court decisions, it appears that the Cash Basis Law is not implicated if the obligation to pay is dependent on a contingency and funds necessary to meet the obligation will be available after the contingency is met. Thus, because the Lease Leaseback transaction can be structured to comply with these requirements, it appears that the Cash Basis Law would not be implicated. Even if it were to be determined that the Cash Basis Law applied to the transaction, the transaction could also be structured so an exception to the Cash Basis Law would apply. Each of these issues is discussed in detail below. In the Lease Leaseback transaction, a municipality would presumably not have the cash on hand when it enters into the Lease Leaseback arrangement. However, the municipality s obligation to pay could be made contingent on its receipt of electric, water and wastewater. This closely resembles the fact scenarios in Wyman and International Association of Firefighters, in that the municipality is not obligated for the entire amount on the date the contract is executed. Specifically, the Lease Leaseback transaction would not be inconsistent with the Cash Basis Law because it would provide that: 1. The private entity would operate, maintain and improve the municipality s electric, water and wastewater system for an upfront cash payment (which isn t considered indebtedness of the municipality); 2. In return, the municipality would pay a fee for the services of the utilities, including upgrades; 3. The payments by the municipality would be contingent upon the services being provided, thus not triggering the Cash Basis Law; 4. There could also be an out or off ramp provision in which the municipality would have the option of taking back control and operation of its electric, water and wastewater system based on it making a certain payment. This would be permissible so long as it was the municipality s option and not some type of remedy based on an event of default. There are various additional structures, as long as they do not constitute indebtedness, or if they do constitute indebtedness, as long as they are contingent upon future events, that also may be included in the Lease Leaseback so that it complies with the Cash Basis Law and also protects the parties rights as contemplated under the agreement. Based on the above authorities, it appears that a Kansas court would find that a contingency existed. img AND ALINDA Utility Management Approach City of Gardner RFI for Electric, Water and Wastewater Systems 19

24 Conclusion The city of Gardner is taking a proactive approach to overcoming its fiscal challenges related to infrastructure investment and O&M in order to position the community for continued growth. The City is not unique in the challenges it faces. Infrastructure across the country is deteriorating as a result of deferred maintenance and capital improvements that has continued for decades. Dan McCarthy, President and CEO of Black & Veatch s global water business, wrote in Fast Company: In the United States, much of our water infrastructure is managed by local governments. These governments face hard choices, particularly during economically challenging times when tax revenues are low. Many choose to spend less rather than charge more for services such as water. More often than not, capital improvements to essential infrastructure are not funded and routine maintenance is deferred. If you don t change the oil in your car you will eventually have to replace the engine. Similarly, deferred infrastructure maintenance creates problems that are more expensive to fix than what it would have cost to maintain and improve. 1 The consolidation of the City s electric, water and wastewater services under an LTSA provides needed funding for capital infrastructure of these essential services, enabling the City to fund other capital programs and services, such as roads, bridges and park services. The arrangement transfers all risk associated with maintaining, operating and improving the electric, water and wastewater systems from the City to the Company, without losing ownership of the systems. This arrangement also ensures continuity of employment for current utility employees. If you don t change the oil in your car you will eventually have to replace the engine. Similarly, deferred infrastructure maintenance creates problems that are more expensive to fix than what it would have cost to maintain and improve. Dan McCarthy The ability to maintain and improve essential electric, water and wastewater systems, in addition to funding and providing other valued community services will position the City for continued growth, enabling Gardner to become one of the most livable communities in Johnson County. 1. Water is a Fuel with No Alternatives. Fast Company. 15 August is afuel with no alternatives img AND ALINDA Conclusion City of Gardner RFI for Electric, Water and Wastewater Systems 20