Asset Management:
A Financial Perspective
May 7, 2008
Presented by: Robert S. Grantham, Sr. PM, FCS GROUP Ed Cebron, Principal, FCS GROUP
2008 ACWA Spring Conference & Exposition, Monterey, CA
Presentation Outline
Asset Management Concepts and Benefits
Asset
Management
Concepts
Strategic Asset Management
Information Technology Operations & Maintenance Capital Improvement Program Finance Integrated Asset Management Plan Integrated Asset Management Plan Administration PlanningKey Questions for Each
Agency
What kind of agency do we want to be?
What are our assets? Where are they located?
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?
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.”
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?
Asset Management Approach
Project prioritization based on…
– Risk
– Level of service objectives – Asset conditions
– Financial feasibility
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
Benefits of Asset Management
Information Technology Operations & Maintenance Engineering/ CIP Finance Integrated Asset Management Plan Integrated Asset Management Plan Administration Planning Strategic Improved risk managementImproved capital &
financial planning
Increase asset lives &
reliability
Improved stewardship,
accountability, and communication
Infrastructure
Needs
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
Key Metrics
Identified improvements
– Potential future regulatory requirements – Operational improvements
Coordination with other divisions and
departments
Established cost-benefits objectives
Asset Risk
Risk = Criticality x Vulnerability
Criticality: Consequence of asset failure
Vulnerability: Likelihood of asset failure
Asset Useful Life
Straight Line Depreciation Actual Condition Rehab Reconstruct CONDI TIONWastewater 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
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
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
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
Capital Funding Sources
Rates
Capital facility charges
Capital reserves
Grants
Debt
Developer contributions
Public private partnerships
Capital Funding Sources
Rates
Capital facility charges
Capital reserves
Grants
Debt
Developer contributions
Setting Reserve Targets
Identifying appropriate levels of accumulated cash and
designating discrete purposes for those fund balances
Types of
Financial
Reserves
Operating Reserves: Capital Reserves: – System expansion– System rehabilitation & replacement (“R&R”)
– Capital contingency Special Reserves:
Capital Reserves
Identifying future system needs and using cash-funding as one part of a financial strategy to best accomplish or address those needs
Key Policy Objective:
Isolate & Protect Capital Resources
Ensure timely and appropriate use of debtproceeds
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
System R&R
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
Provides a resource for ongoing repair, replacement, and rehabilitation of the system
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
System R&R
(cont.)
The sinking fund balance peaks as contributions are made in the early years in excess of needs and then declines in the Needs peak and taper off but funding is
provided on a uniform basis. The contribution in excess of needs is
The sinking fund balance peaks as contributions are made in the early years in excess of needs and then declines in the Needs peak and taper off but funding is
provided on a uniform basis. The contribution in excess of needs is
You can expect to see a sinking fund curve that is similar in shape to the needs curve only steeper.
$-$500,000 $1,000,000 $1,500,000 $2,000,000 2004 2010 2018 2026 2034 2042 2050 2058 2066 2078
R&R Sinking Fund
Contributions in excess of needs creates accumulations in the the sinking fund.
$100,000 $200,000 $300,000 $400,000
2004 2010 2018 2026 2034 2042 2050 2058 2066 2078
Pipe/Mains Needs versus Funding
You can expect to see a sinking fund curve that is similar in shape to the needs curve only steeper.
$-$5,000,000 $10,000,000 $15,000,000 $20,000,000 2007 2013 2021 2029 2037 2045 2053 2061 2069 2081
R&R Sinking Fund
Contributions in excess of needs creates accumulations in the the sinking fund.
$1,000,000 $2,000,000 $3,000,000 $4,000,000
2007 2013 2021 2029 2037 2045 2053 2061 2069 2081 Pipe/Mains Needs versus Funding
System R&R
(cont.)
The R&R fund is only intended to fund the peak spending as
Capital Funding Percentages With Debt, RR & Cash Funding
0% 20% 40% 60% 80% 100% 2003 2015 2030 2045 2060 2075 Debt Funding
Current Rate Funding
R&R Funding
Capital Funding Mix
With Debt, RR & Cash Funding
0% 20% 40% 60% 80% 100% 2007 2020 2035 2050 2065 2080 Debt Funding
Current Rate Funding
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
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
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
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