central iowa regional water working group–bondurant - $0.5m refinanced; approximately $29,000/yr....

Regional Cost-Sharing

Framework

JULY 2018

Central Iowa Regional Water

Working Group

Notice

The contents of this presentation include preliminary calculations of a possible scenario for forming a regional water authority in the Des Moines area. The values provided are intended for illustrative purposes only and not for any other reason than to facilitate discussion of the cost-sharing framework under which the proposed regional authority may operate.

All information provided in this presentation is subject to change.

FCS GROUP

Preliminary – For Discussion Only – Subject to Change

Agenda

Review of Phase 2 Objectives

Definitions: What is the Regional Cost Sharing Framework?

Quantifying Costs

– Costs at Formation

– Ongoing Costs

Regional Cost Allocation

Next Steps


Review of Phase 2 Objectives

FCS GROUP


Phase 2 is a Business Case Evaluation

5

What are the costs of producing with the current structures and approaches?

What is the expected cost of producing assuming the presence of a regional Authority?

Question 1

Question 2

BIGQUESTIONS

ANSWERSPHASE 2

FCS GROUP


Quantify the Net Costs/Benefits

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038

$ p

er 1

,00

0 G

allo

ns

Avg. Cost per 1,000 Gallons- Community X

Regional case

Status Quo case

The difference between the total average cost per unit of production defines the net cost or benefit in the business case

ILLUSTRATION ONLY

FCS GROUP


The Steps to Get to the Answers

Status Quo Forecasts

Future Cost Sharing Plan

Authority Forecasts

June 27 July 31 August 30

How much can each community expect to

pay for produced water based on

today’s production functions?

How will future costs be shared if the

Authority assumes responsibility for rate setting and regional water production?

How much can each community expect to

pay for produced water assuming the

Authority is responsible for all

delivery?

You are here!


Definitions: What is Regional Cost

Sharing?

FCS GROUP


Regional Cost Model

9

Regional Authority

O&M Contracts

Reserve Purchases

Project Costs

Existing Assets

MembersCost

Framework

Costs incurred at start-up

Ongoing expenditures

The regional Authority incurs the operating and capital costs of producing water and passes those costs on to the Members by way of a framework that defines the cost allocation process.

Admin Costs

Startup Costs

FCS GROUP


Regional Cost Sharing Framework

Establish a series of rules that clearly define the quantification of costs to be

recovered through rates, and the method of allocating costs to individual

Members.

Quantifying costs:

– Capital costs

– Operating costs

Allocation:

– Who pays for what types of costs, and

– Why (the rationale) members pay for those costs


Capital Costs at Formation

FCS GROUP


Existing Assets

Subscribed

Reserve

Authority pays price per MGD as compensation to owners

Authority does not pay for this portion, but accepts it as a contributed asset at book value.

The entire asset is transferred to the Authority creating the following impacts:

a) Payments for reserve capacity are a capital cost to be financed and recovered in the Authority’s rates.

b) Contributed assets require ongoing repair & replacement (an ongoing capital cost)

c) Contributed assets also result in a credit to individual Members against future capital cost allocations.

Existing Assets

FCS GROUP


Total Capacity

Member

Owned

Production

Capacity (MGD) ASR (MGD)

Purchased

Capacity (MGD)

Total Capacity

(MGD)Polk County 1.95 1.95 Berwick 0.25 0.25 Urbandale 15.30 15.30 WDMWW 10.00 8.97 18.97 Ankeny 1.3 8.28 9.58Clive 6.98 6.98 Waukee 3.69 3.69 Warren Rural 3.25 3.25 Xenia 2.95 2.95 Norwalk 1.97 1.97 Bondurant 1.20 1.20 Altoona 4.00 1.00 5.00 Polk City 0.30 0.35 0.65 Grimes 2.52 0.72 3.24 Johnston -DMWW 110.00 9.50 (56.14) 63.36

TOTAL 126.82 11.52 0.00 138.3

FCS GROUP


Reserve Capacity

Member

Total Capacity

(MGD) Demand (MGD) Over/(Short)

Recognized

ReservePolk County 1.95 2.51 (0.56) 0.00Berwick 0.25 0.13 0.12 0.12Urbandale 15.30 10.64 4.66 4.66WDMWW 18.97 14.80 4.18 4.18Ankeny 9.58 11.58 (2.0) 0.00Clive 6.98 4.03 2.95 2.95Waukee 3.69 3.38 0.31 0.31Warren Rural 3.25 3.44 (0.19) 0.00Xenia 2.95 2.53 0.42 0.42Norwalk 1.97 2.38 (0.41) 0.00Bondurant 1.20 1.29 (0.09) 0.00Altoona 5.00 3.49 1.51 1.51Polk City 0.65 1.10 (0.45) 0.00Grimes 3.24 2.47 0.77 0.77Johnston - 5.07 (5.07) 0.00DMWW 63.36 46.26 17.11 17.11

TOTAL 138.34 115.09 23.25 32.03

FCS GROUP


Cost Data to Inform Reserve Price

Information SourceCost per Unit

($ / Gal.)

Estimated Cost of 32 MGD Reserve

($ million)

Estimated DebtService per Kgal*

Avg. Book Value of Assets (2018) $1.56 $50.0 $0.14

BV Report Mid-Range (2018 $) $2.64 $84.7 $0.23

Purchased Capacity Offer (2018 $) $2.82 $90.4 $0.25

BV Report RCLD (2018 $) $3.38 $108.2 $0.30

MEDIAN $2.73 $87.6 $0.23

* At 4% interest, 30 yr. term; 21.61 billion gallons annual delivery (2018 estimated annual demand)

FCS GROUP


Payments for Reserve

Reserve

Authority pays price per unit of unused capacity at the time of formation.

Reserve

Subscribed

32 MGD x = $87.6 millionEstimated Reserve Median

$2.73

FCS GROUP


Residual Local Debts

What if the payments made for reserve capacity are less than the outstanding

debts held by local communities?

Assume a price of $2.73 applies for reserve payment

Members with Debt Outstanding

Reserve Pmt. Received

Estimated Debt as of 2018

Residual Debt to Authority

Grimes $2.1M $4.3M $2.2M

West Des Moines* $11.4M $9.6M $0.0M

Ankeny $0.0M $6.4M $6.4M

Bondurant $0.0M $0.5M $0.5M

Urbandale $12.7M $7.3M $0.0M

DMWW** $46.8M $11.4M $0.0M

TOTAL $73.0M $39.6M $9.1M

* Includes $7.5M bonds plus $2.1M in financed purchased capacity** Includes $27.7M total debt net of financed purchased capacity debt for Ankeny ($6.4m), Bondurant ($0.5M), Urbandale ($7.3M), and WDMWW ($2.1M)

FCS GROUP


How to Address Residual Debt in Rates

The Authority could refinance the residual debts to ensure assets can be

transferred without issue.

However, this debt is above and beyond the Authority’s needs.

The debt service should be recovered separately, apart from the normal rates,

from those affected:

– Grimes - $2.2m refinanced; approximately $127,000/yr. (~ $0.23 / kgal)

– Ankeny - $6.4m refinanced; approximately $370,000/yr. (~ $0.15/ kgal)

– Bondurant - $0.5m refinanced; approximately $29,000/yr. (~ $0.13/kgal)

Note: Estimates assume 4% financing, 30 yrs. $/kgal assumes 2018 each community’s individual demands from our analysis. Debt for Ankeny and Bondurant is related to financed purchased capacity.

FCS GROUP


Contribution of Subscribed Capacity

Reserve

Subscribed

Asset: $143.4MContributed Equity: $143.4M

CREDITDEBIT

Contributions will be explicitly shown as an amortized credit against future capital costs for those Members making the contributions (i.e., asset transfers)

FCS GROUP


How Contributions will Work

Item Value

Assets Allocated toMember (on demands)

$1,000

(Less) UnamortizedContribution

(200)

Net Assets to Member $800

Rate of Return 6%

Return Portion $48

Annual Capital Cost = Net Assets to Member x Rate of Return + Depreciation Expense

Item Value

Depreciation Expense onMember Assets

$25

(Less) Amortization of Contribution

(6)

Net Depreciation Expense $19

Total capital cost from this simple example is $67 for the year.

It would have been $85 without the credit for contributions (saves 21% in this year).

Calculation of Return Portion: Calculation of Depreciation Portion:

FCS GROUP


Estimated Contributions

Member

% of Plant Subscribed Net of Purchased

Capacity

OCLD of Physical Plant

(2018 est. / $ millions)

EstimatedContribution

($ million)

DMWW 73% $170.8 $124.7

Altoona 62% 7.1 4.4

Polk City 100% 0.1 0.1

WDMWW 58% 11.9 6.9

Grimes 76% 9.6 7.3

Total $199.4 $143.4*

Recommended amortization period is 40 years after which the contribution amounts will be zero; the amount is reduced by 1/40th each year.

Contribution totals subject to change based on final determination of asset list –currently in progress with Technical Committee.

FCS GROUP


Summary of Formation Costs

These are the costs the Authority is expected to take on as part of its

formation-related acquisition of assets and payment for reserves.

Item Asset ($ million)

Liability($ million)

Equity($ million)

Reserve Capacity $87.6 $87.6 -

Asset Contributions 143.4 - 143.4

Residual Debts 9.1 9.1 -

Totals $240.1 $96.7 $143.4

FCS GROUP


Rate Implications from Formation Costs

Item Value

Net Asset Value $240.1

X 6 % return 14.4

(Less) Contribution Credits (6.2)

Net Return on Existing Assets $8.3

Cost per Unit = $0.60 / Kgal

Not only does the amount itself decrease every year as assets depreciate, but the average cost decreases as demand increases.

Item Value

Depreciation $8.0

(Less) Contribution Credits (3.3)

Net Depreciation on Existing Assets $4.7

Calculation of Return Component Calculation of Depreciation Component

Grand Total: $13 million

FCS GROUP


What About Startup Costs?

Startup costs are currently unknown but are expected to include:

– Legal fees

– Engineering and consulting fees

– Initial payrolls for Authority staff

– Administrative & Insurance costs

These costs could be capitalized along with the others

– Every $1m in additional cost will add an amortized $0.003 per kgal


Ongoing Costs

25

FCS GROUP


Fixed Operating Costs

The Authority expects to enter into operating contracts with existing

producers for the operations of the production facilities and network.

Cost Item DMWW WDMWW Altoona Grimes

Admin / A&G $7.5 $0.2 $0.0 $0.2

Fixed O&M 15.8 1.4 0.5 $0.9

Total Fixed Cost 23.3 1.6 0.5 1.1

MGD Owned (MGD) 119.5 10 4 3.2

Cost per MGD $0.195 $0.160 $0.130 $0.329

Total fixed O&M costs currently at $26.5 million for 136.7 MGD for an average (of these operators) of $193,915 per MGD.

$1.23 per Kgal

FCS GROUP


Variable Operating Costs

Variable operating costs will be handled as a direct pass-through under the

Operating Agreements.

Cost Item DMWW WDMWW Altoona Grimes

Variable O&M $6.2 $1.0 $0.4 $0.3

Kgal Produced (2018) 18.3M 2.0M 0.7M 0.5M

Cost per KGal $0.34 $0.51 $0.49 $0.62

$0.37 per Kgal

FCS GROUP


Project Costs – the Capital Call

The Authority will need to raise money ahead of major investment programs.

To do so, it will need to securitize revenues ahead of time, meaning it will

need to raise revenues before the projects are started.

We propose recognizing 3-years’ worth of projects based on approved capital

budgets.

Add the project budgets as assets for the purposes of rate setting.

$137 million X Return of 6%

8.2 million

+ Depreciation of 1/33rd

4.2 million

$12.4 million

FCS GROUP


Project Costs

Our estimate of regional project costs through 2022 (reflecting Authority’s

first financing effort) is approximately $137 million to add 17 MGD.

Item Amount Financed Annualized Return

Annualized Depreciation

Total Values $137 million $8.2 million $4.2 million

Cost per Kgal - $0.38 $0.19

DMWW LRP

Projects, $95.4

ASR, $7.3

Other Regional,

$33.8

Regional Project Breakdown (2018-2020)

Key facilities included:- Fleur- Saylorville- Core network- LP Moon- ASR #4- 4 MGD Other

FCS GROUP


Administrative Costs

The Authority is likely to have its own administrative costs related to some

level of staffing, consulting, engineering, audit and related expenses.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

DMWW Grimes WDMWW Altoona

Admin. Cost as % of Total Production O&M Cost

• Average is 23% of total operations & maintenance cost• Reduce this by half to avoid duplication with O&M contracts

$1.23 per Kgal x 23% x 0.5 = $0.14 per Kgal

FCS GROUP


Summarizing Costs

Cost ItemsEstimated Cost

per Kgal for 2018

Formation Costs $0.60

Operating Agreements $1.60

Administrative Costs $0.14

Total Before Project Costs* $2.34

CAUTION! This is not the expected rate for all Members. It’s what we would

expect if we divided total Authority revenue by total water sold. This value is subject to change.

Project Costs $0.57

Total with Project Costs $2.91


Regional Cost Sharing

33

FCS GROUP


General Cost Allocation Plan

100% of Costs Incurred

Avg. Usage

Peak Usage

Portion of assets used to meet average daily demands, allocated based on average-day use

Portion of assets used to meet peak demand, allocated based on max-day useB

A

Member ADD MDD

Member 1 20 MGD (67%) 30 MGD (60%)

Member 2 10 MGD (33%) 20 MGD (40%)

Total 30 MGD 50 MGD

Members will be allocated costs proportionate to their usage of the regional water production system; all usage based on measured demands.

FCS GROUP


Joint Cost Sharing Over Time

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2018 2021 2024 2027 2030 2033 2036 2039 2042 2045 2048 2051 2054 2057 2060

Des Moines WDMWW Ankeny Urbandale Johnston Waukee All Other

Change in Projected Total Water Demand Over Time

Demand for the top 6 communities as of 2018 will decline from 77% of the total water delivered to just 62% of the total – the bottom 15 users today will pick up 15% more of the costs in the future

FCS GROUP


Allocate to Avg. and Peak Portions

Capital Cost Grouping 2018 Total Capacity

Total ADD in Region

% Used for Avg. Day

% Used for Peak

Existing Production and Core Network

138.3 MGD 59.2 MGD 43% 57%

• 43% of the costs shared jointly based on average-daily demand.

• 57% of the costs shared jointly based on maximum-daily demand.

FCS GROUP


Example: Allocating the Costs

Cost Items

Estimated Costs as of

2018Costs Related to ADD (47%)

Cost Related to MDD (53%)

Formation Costs $13.0 $5.5 $7.4

Operating Agreements 34.5 14.8 19.7

Project Costs / Financing 12.3 5.3 7.0

Administrative Costs 3.0 1.3 1.7

Total* $62.8 $26.9 $35.9

59.2 MGD of 138.3 is used in 2018 to provide average-day demands (47%); the rest is available for maximum-day demands (53%)

FCS GROUP


Cost-Sharing Groups

Expansion #2

Expansion #1

Initial Facilities

Capacity

Cost shared jointly among all members

Cost shared specificallywith Group 1

Cost shared specificallywith Group 2

FCS GROUP


Example: Who Shares the Costs?

Cost Items

Estimated Costs as of

2018Sharing Group

Formation Costs $13.0 Joint

Operating Agreements 34.5 Joint

Project Costs / Financing 12.3 Program 1

Administrative Costs 3.0 Joint

Total* $62.8

FCS GROUP


Example: Allocate the Joint O&M Costs

Member As % of ADD($ million)

As % of MDD ($ million)

TOTAL ($ million)

$ per Kgal

DMWW $5.8 $7.3 $13.1 $1.67

WDMWW $2.2 $3.0 $5.2 $1.77

Ankeny $1.8 $2.4 $4.3 $1.75

Urbandale $1.2 $1.8 $3.0 $1.87

Johnston $0.6 $1.1 $1.7 $1.99

Waukee $0.6 $0.9 $1.5 $1.91

All Other $3.9 $5.0 $8.8 $1.70

Total $16.1 $21.5 $37.5 $1.74

The calculation naturally results in a different rate per 1,000 gallons due to differences in how members use the system to meet peak needs.

FCS GROUP


Example: Allocate the Joint Capital Costs



TOTAL ($ million)

$ per Kgal

DMWW $0.0 $0.0 $0.0 $0.00

WDMWW $1.0 $1.5 $2.5 $0.86

Ankeny $1.1 $1.5 $2.5 $1.05

Urbandale $0.7 $1.1 $1.8 $1.12

Johnston $0.4 $0.6 $1.0 $1.19

Waukee $0.3 $0.5 $0.9 $1.14

All Other $1.9 $2.4 $4.3 $0.82

Total $5.4 $7.6 $13.0 $0.60

The joint capital costs are adjusted for individual credits due to Members for contribution of Authority assets; these values will change in the future with more investment

FCS GROUP


Applying Credits for Contributions

Item Description DMWW WDMWW

Allocation of Assets Based on Demands ($M)

$83.8 $33.2

Contributed Assets ($M) $(124.7) $(6.9)

Net Assets ($M) $0.0 $26.2

X 6% Return ($M) $0.0 $1.6

• Contributions are amortized over time, reducing the amount available for credit each year.

• New investment in the original assets will increase the asset base but will not increase the credit – increasing the capital costs for the member

FCS GROUP


Example: Allocate the Project Costs



TOTAL ($ million)

$ per Kgal

DMWW $0.5 $0.7 $1.2 $0.15

WDMWW $0.7 $1.0 $1.7 $0.58

Ankeny $0.4 $0.5 $0.9 $0.39

Urbandale $0.2 $0.3 $0.5 $0.34

Johnston $0.5 $0.9 $1.4 $1.66

Waukee $0.1 $0.1 $0.1 $0.19

All Other $2.8 $3.6 $6.5 $1.24

Total $5.3 $7.1 $12.3 $0.57

These costs are shared differently – it’s based on the contribution each member makes to the growth of the system.

FCS GROUP


Cost Sharing Group – In Depth

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Joint Costs Program Group 1

Joint Cost Sharing % vs. Program Grp. 1

OTH

WKE

JON

URB

ANK

WDM

DMWW

• All capital costs of these facilities will be included in the group

• Additional groups for future programs

• Those with highest growth expectations share larger portion of the program costs

FCS GROUP


Summary of Our Example Allocations

Member O&M Costs($ / Kgal)

Formation Costs

($ / Kgal)

Subtotal($/Kgal)

Project Costs ($ / Kgal)

Grand Total ($/Kgal)

DMWW $1.67 $0.00 $1.67 $0.15 $1.82

WDMWW $1.77 $0.86 $2.63 $0.58 $3.20

Ankeny $1.75 $1.05 $2.80 $0.39 $3.19

Urbandale $1.87 $1.12 $2.98 $0.34 $3.32

Johnston $1.99 $1.19 $3.18 $1.66 $4.84

Waukee $1.91 $1.14 $3.04 $0.19 $3.23

All Other $1.70 $0.82 $2.52 $1.24 $3.76

AVG $1.74 $0.60 $2.34 $0.57 $2.91

FCS GROUP


Take Aways

Today is NOT a final answer of any sort

The figures give a “ballpark” estimate of how the cost allocations may look if

the authority were to assume responsibilities today

Figures do not give any indication of

– Future costs

– Economies of scale, either short or long-run

– Comparison of scenarios

Much is left to come….August


Next Steps

Jason Mumm, Executive Consultant(303) 652-7548

[email protected]

central iowa regional water working group–bondurant - $0.5m refinanced; approximately $29,000/yr....

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