Download - 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
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Asset Management Asset Management Concepts
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Strategic Asset ManagementStrategic Asset Management
InformationTechnology Planning
Operations& Maintenance
IntegratedAsset
IntegratedAsset Administration
ManagementPlan
ManagementPlan
Capital ImprovementProgram
Finance
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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?
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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
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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
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Institutional Knowledge
Asset Management ApproachAsset Management ApproachProject prioritization based on…
RiskRiskLevel of service objectivesAsset conditionsFinancial feasibility
Strategic Planning
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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
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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
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Infrastructure Infrastructure Needs
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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
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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
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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)
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Asset Useful LifeAsset Useful Life
Actual Condition
Rehab
Straight LineDepreciation
Reconstruct
p
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Valve ReplacementValve Replacement
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Pump VolutePump Volute
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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
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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.
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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
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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
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Capital Financing
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Capital Funding SourcesCapital Funding Sources
RRatesCapital facility charges
Capital reservesCapital reservesGrantsDebt
Developer contributionsPublic private partnerships
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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
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Setting Reserve TargetsSetting Reserve TargetsIdentifying appropriate levels of accumulated cash and designating discrete purposes for those fund balances
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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
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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
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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
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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
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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
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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
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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.
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Reserve Reserve Management
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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
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Use of Debt
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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
Page 36www.fcsgroup.com