Doheny Desalination Project Value-for-Money Analysis. March

Transcription

1 Doheny Desalination Project Value-for-Money Analysis March

2 Presentation Overview Team Introductions Goals of the VfM Analysis Financial Model Estimated Monthly Impacts to Typical Households In District Service Area Risks/ Risk Adjusted Cash Flows Discussion 2

3 Team Introductions Mark Donovan, PE - GHD Desalination Program Manager 20 years of seawater desalination experience delivering projects across the globe under various project delivery methods Greg Finlayson - GHD Senior Principal Water & Strategy Technical Program Manager Victorian Desalination Project (120 mgd / AU$3B) Charles Snyder Professional Infrastructure Consulting Services (PICS) California Infrastructure Fund Bechtel Group PWC Securities 3

4 Key Questions facing SCWD to implement the Doheny Desalination Project 1. Which project delivery method is most appropriate? Design-build-operate (DBO), or Public-private-partnership (PPP) 2. Does the preferred delivery method change with different project sizes? 5 mgd base case from previous investigations 15 mgd larger regional project 4

5 What is a VfM? Value for Money is a tool used to assess the relative life-cycle costs and benefits of alternative project delivery methods Will a PPP delivery compare favorably with traditional public sector project financing undertaken by the District? Does greater risk transfer (value) offered by PPP outweigh its extra costs (money)? 1. Development of cash flow model 2. Risk identification / quantification 3. Risk-adjusted cash flow analysis 4. Recommendations 5

6 Assumptions and Limitations Key assumptions of our analysis have been covered in this presentation. However it is recommended that this presentation is viewed in the context of the full VfM report which contains further details. In parallel to this VfM analysis, CDMSmith is completing a District-level Reliability Study. Therefore, the focus of this VfM report is not the decision to execute the Doheny Desalination Project or not rather, it focuses on determining the best delivery approach for its implementation. 6

7 Project Delivery Methods 7

8 Delivery Method Option 1 - DBO Design-Build- Operate (DBO) Project is financed and owned by the District. Private sector contracts to design, build and operate the facilities For example: Charles E. Meyer Desalination Facility (Santa Barbara) 8

9 Delivery Method Option 2 - PPP Public- Private Partnership (PPP) Private Sector sponsor to build, own, finance and operate the facilities Water sold to the District under a long term water purchase agreement For example: Carlsbad Desalination Project 9

10 Cost Estimates and Assumptions 10

11 Capital and Operating Cost Estimates 5 mgd project Base Project, based on sizes from work-to-date. Includes site works that allow expansion to larger capacity in the future CAPEX (2018 dollars) = $105 million OPEX (in 2020 dollars) = $6 million per year (if operating at full capacity all year). Design-build Contractor s Overhead & Profits Allowance for Incomplete Cost Estimation Design-build Contingency 11

12 Capital and Operating Cost Estimates 15 mgd project Larger project. Latest slant well work suggests a larger project might be feasible. Additional CAPEX for potable water distribution system augmentation will be required, though not yet fully scoped or costed. $50 million allowed CAPEX (2018 dollars) = $240 million OPEX (in 2020 dollars) = $16 million per year (if operating at full capacity all year). Design-build Contractor s Overhead & Profits Allowance for Incomplete Cost Estimation Design-build Contingency 12

13 Key Assumptions in Project Analysis Base estimates of Project parameters: Parameter Base estimate Unit Comment First year of construction 2018 (i.e. FY 2017/18) First year of operation 2020 (i.e. FY 2019/20) Inflation 2.0% p.a. General inflation rate (CPI). Analysis in nominal dollars Capital price escalation Used to convert current CAPEX estimates (in 2016 dollars) 2.5% p.a. rate to future (in 2018 dollars) Electricity price in 2020 $ per Important parameter since desalination is energy kwhr intensive Electricity price escalation rate Variable cost escalation rate 2.6% p.a. Annual increase to power price 2.0% p.a. Fixed cost escalation rate 2.0% p.a. Discount rate 4.0% p.a. Based on SCWD advice Residual value of assets not included in analysis Includes cost of chemicals, disposal of waste streams (sludge and brine) and other costs. Assumed to rise with inflation. Includes cost of labour, maintenance, insurance and water quality laboratory tests. Assumed to rise with inflation. 13

14 Interest rate (% p.a.) Financing Unique to DBO Project is eligible for DWSRF loan, which offers fixed-rate loan at half the State GO bond rate. A PPP entity will not be eligible for this loan. Principal and interest for DWSRF loan is repaid over 20 years from start of operation Only interest is serviced during construction period Project may be eligible for a State Grant from California Dep. Water Resources, up to $5 million 2.6% 2.4% 2.2% 2.0% 1.8% 1.6% Recent SRF loan rates: 14

15 Base Estimates Adopted for DBO Financing Parameter Base estimate Unit Comment DWSRF loan proceeds 100% DWSRF loan interest rate 2.0% p.a. Loan repayment period 20 years I.e. proceeds from the DWSRF loan will be available to finance 100% of project costs Since 2012 interest rates offered have ranged from 1.6% to 2.1% p.a. and in 2017 to date, the rate is 1.7%. For drinking water projects not serving 'disadvantaged communities', repayment period of 20 years applies according to the terms of the DWSRF loan. The 20 years is commences 'within one year of completion of construction' State Grant $5 million Assumes maximum grant amount received. Applied as principal forgiveness sum i.e. a single lump-sum payment at beginning of operation period (after construction and proof-of-performance). 15

16 Contractual Structure Unique to PPP Under the PPP delivery method, a special purposes company will be established to take responsibility for financing, building, owning and operating the Project facilities A Water Purchase Agreement will be executed between PPP entity and SCWD for the off-take of water Requirement for District to take and pay for all water available from the Project Contract period of 30 years to provide credit support for the project financing Allocation of project risks between the PPP and District will be a critical component of the PPP contractual structure and value of this project delivery approach. 16

17 Base Estimates Adopted for PPP Parameters Parameter Debt / equity financing Base estimate 70% debt / 30% equity Unit Comment A reasonable range for debt to equity would be 60%-40% for conservative leveraged projects to 80%-20% for more highly leveraged projects. Equity stake may consist of a contribution from PPP Special Company as well as their subcontractors. Internal rate of return (IRR) sought for equity 9.5% p.a. IRR of 9.45% p.a. in Carlsbad Desalination Project WPA. The IRR demanded by equity participants varies depending on the strength of the project s contractual structure. IRRs can range from 5.5% to 15%, but are likely to be 8.5% to 12%. Debt interest rate 4.75% p.a. PPP can raise private activity bonds ( PABs ). Interest rate will depend on balance sheet of the owner, project structure / risks, and the District s credit. There is a risk that in the current economic and political climate, the rate is more likely to increase rather than decrease. 17

18 Cash Flow Analysis Base Estimates 18

19 Key Financial Outputs to Assess Project Net present cost (NPC) The sum of the discounted annual cashflows over the Project timeframe Lower NPCs are favorable to Project viability and capture whole-of-project factors NPC components include capital costs, operating costs, and value of risks. Cost of water profile Yearly breakdown of cost of desalinated water on $/AF basis over Project timeframe Cost profile illustrates the relative cost impact to current and future water customers Yearly water cost compared to MET imported water cost affects the value of the MWD rebate Monthly rate impact to customers Simplified calculations intended to estimate rate impacts to SCWD water customers Typical household consumes 10 hundred cubic feet (HCF) of water per month 19

20 Model Results - Overview 5 mgd 15 mgd DBO PPP DBO PPP Total Project Construction Cost $105 M $244 M NPC of Project $198 M $262 M $504 M $644 M Note: value of risk not included Project construction costs are assumed to be the same under both DBO and PPP approaches, as both will use similar fixed-price contract forms Project NPC is less under the DBO approach, mostly due to the significant advantage of DWSRF financing (to be discussed further) 20

21 Cash Flow Profiles DWSRF loan repaid (DBO only) 21

22 MET Rebate Options Rebate Option Nominal value of rebate Period of duration Rebate Option 1 Up to $475 per af First 15 years of operation Rebate Option 2 Up to $340 per af First 25 years of operation MET Local Resources Program (LRP) Rebate only provided to the extent that the cost of desalinated water is greater than that of MET imported water 22

23 MET Rebate Options Rebate Option 5 mgd DBO 5 mgd PPP NPC Cost of water in 2020 NPC Cost of water in 2020 No Rebate $226 M $2288 / AF $290 M $2764 / AF Rebate Option 1 ($475/af, 15 yr) Rebate Option 2 ($340/af, 25 yr) $198 M $1813 / AF $262 M $2289 / AF $202 M $1948 / AF $261 M $2424 / AF Similar results for 15 mgd Project Rebate Option 1 minimises NPC and maximises the benefit received in the earlier years of the project when there is a larger gap between cost of desalinated water and MET imported supply But Rebate Option 2 option has a smoother cost of water over time, and the difference in project NPC compared to Rebate Option 1 is not large. Rebate Option 1 is the preferred option (and is included in all base estimates) 23

24 DBO Financing Options no SRF? Table below shows that non-srf DBO financing results in DBO financial outcomes being similar to PPP E.g. municipal bonds with i = 5% p.a. over 30 years DBO DWSRF 5 mgd 15 mgd DBO Municipal bonds PPP DBO DWSRF DBO municipal bonds Effective interest rate 2% p.a % p.a. 6.2% p.a.* 2% p.a % p.a. 6.2% p.a.* Loan repayment period 20 years 30 years 20 years 30 years NPC of Project $198 M $232 M $262 M $504 M $584 M $644 M PPP Cost of water in 2020 $ 1503 / AF $ 1886 / AF $2289 / AF $ 1240 / AF $ 1526 / AF $1811 / AF The availability of the SRF loan for the DBO is the most significant factor creating the cost differential between the DBO and PPP 24

25 PPP Financing Options DBO repayment terms are fixed, however PPP allows for more flexibility in financing. At Carlsbad, back-loaded financing at 2.5% p.a. was incorporated in WPA to decrease cost of water in early years of project. Value of capital repayments escalate at a fixed rate each year and loan is paid off over same timeframe Back-loaded financing offers a way to reduce immediate increases in water bills with relatively small impact on total Project NPC Could be investigated further if PPP delivery is adopted. 25

26 PPP Financing Options 5 mgd: Project Size 5 mgd Escalation Constant 2% p.a. 4% p.a. Project NPC $262 M $267 M $273 M Similar results for 15 mgd Project 26

27 Approximate Monthly Bill Increase To Typical Residential Customer 5 MGD Desalination Project DB0 30 Year SRF Loan DBO 20 Year SRF Loan PPP $5/month $10/month $20/month 15 MGD Desalination Project DB0 30 Year SRF Loan DBO 20 Year SRF Loan PPP $0/month $5/month $10/month Order of Magnitude Estimate (Rounded to Nearest $5) Figures indicates amount more than purchasing MET water Based on 10 HCF usage per month Figures for first 5 Years of Project 27

28 Summary of Key Points for Base Estimates (Without Risk Adjustment) 1. DBO offers lower whole-of-life costs and lower cost of water than PPP, irrespective of Project size. The financing benefit from the DWSRF loan is the biggest factor. 2. Sensitivity analysis demonstrated CAPEX and electricity costs have biggest impact on Project viability, irrespective of delivery method 3. Back-loaded PPP financing may offer benefits for reducing immediate cost impacts to SCWD and its customers 28

29 Summary of Key Points for Base Estimates (Without Risk Adjustment) 5 mgd 15 mgd Total Project Capital Cost $105 M $244 M NPC of Project DBO $198 M $480 M NPC of Project PPP $262 M $586 M At 5 MGD, additional financing costs of the PPP result in higher NPC of ~ $65 million compared to the DBO. This means (for example) that the PPP would need to find a capital saving of $35 million (which becomes ~$65 million with financing costs) to compete with the DBO. This seems challenging given the total CAPEX of $105 million. Executing the 15 mgd Project requires involvement of multiple other regional agencies. This adds significant complexity to the Project. A PPP would reduce this complexity on behalf of the District, but requires additional NPC of ~$100 million compared to a DBO. 29

30 Risk Analysis Assumptions and Methodology 30

31 Types of risk This is a major capital project, long duration with exposure to external macroeconomic, political and regulatory conditions. There are risks throughout the Project timeframe that cannot be fully mitigated. Risks can be classified by their ability to be transferred: Retained risks: risks residing with the District Transferable risks: risks able to be transferred to the private sector and reduce the District s risk exposure. By also owning and financing the Project, PPPs reduce the overall risk exposure of the District compared to a DBO delivery. 31

32 Risk Allocation and Transfer Risks Party Likely to Accept in DBO Party Likely to Accept in PPP Comment Construction risks (Group A and B) Design and construction errors / avoidable delays / onshore geotechnical risks DB Contractor DB Contractor Slant well construction risks DB Contractor DB Contractor Exchange rate / industrial relations DB Contractor DB Contractor Offshore geotechnical risks SCWD SCWD or shared Many risks to be accepted by DB contractor and costed into the DB contractors bid as contingency. Same risk profile in DBO or PPP as contractual arrangements with DB contractor will be similar. As above, but slant wells are not common assets (thus perceived higher technical risk). Slant well contractors (small, specialist companies) may not be able to bear the full costs (e.g. enter liquidation in the worst case). District would likely provide geotech information as basis in DB contract specification. Difficult to provide certainty of offshore conditions and guarantee suitability for slant wells. Local regulations and/or community concerns SCWD PPP or shared High profile construction in public beach area. May lead to resistance and/or delays. PPP may agree to share risk of approvals. District not exposed Exposure to risk District shares/may be exposed District exposed 32

33 Risk Allocation and Transfer Risks Party Likely to Accept in DBO Party Likely to Accept in PPP Comment Operating risks (Group C and E) Aquifer flow and water quality SCWD SCWD or shared District will have to specify raw water quality and flow in contract specification, based on offshore investigations Electricity and consumables consumption SCWD PPP PPP can be held to electricity consumption benchmarks. Note that O-contractor may also be held to these, but not assumed for VfM analysis. Electricity price SCWD SCWD Energy price increases passed through to District Access to waste disposal options SCWD SCWD Brine outfall and sludge disposal Exposure to risk District not exposed District shares/may be exposed District exposed 33

34 Risk Allocation and Transfer Risks Party Likely to Accept in DBO Party Likely to Accept in PPP Comment Financing and Economic risks (Group F) Inflation and power cost escalation rates SCWD SCWD Interest rate risk SCWD (SRF loan) PPP Debt servicing SCWD PPP Financing risks with District in DBO but SRF is fixed rate loan. PPP takes on finance risk. In PPP case district retains obligations to meet payments to PPP if the PPP performs as required. Water supply risks (various) Water volume & quality produced meets contract SCWD PPP District to provide required treated water quality targets in contract specification. WPA with PPP sets financial penalties if not met. Risk of law change SCWD SCWD E.g. treated water quality regulations Exposure to risk District not exposed District shares/may be exposed District exposed 34

35 Risk Allocation and Transfer Summary Under both DBO and PPP approaches, the exposure to certain major CAPEX risks will be transferred to the DB contractor and certain operating risks will be transferred to the operating contractor. PPP approach will enable a range of risks to be transferred to the private sector (e.g. geotech, regulatory) The extent of this risk transfer will depends on contractual negotiations. All financing risks will be transferred under the PPP approach PPP finance costs will reflect a premium for this risk acceptance DBO approach will provide a level of risk transfer to the DB and operating contractors However, if DBO receives SRF loan, then financing risk is minimal since the interest rate is fixed. 35

36 Quantifying and modelling risks Contingent risk methodology Possible events that could result in additional costs above the base estimate outputs due to unpredictable circumstances Consequence distribution representing estimated range of costs that would be incurred to rectify the consequences of the risk if it eventuates Consequence distribution Likelihood of the risk eventuating (as a percentage probability) Value of risk = consequence x likelihood 36

37 Quantifying and modelling risks Inherent risk methodology Uncertainty in the scope of work and pricing assumptions Inherent risks affect parameters which are direct inputs into economic model These parameters modelled as probability distributions rather than fixed values. E.g. probability distribution of electricity consumption 37

38 Quantifying and modelling risks No bids have yet been sought or received from the private sector for either DBO or PPP delivery of the Project. In practice, the level of uncertainty and hence the risk profile of the Project will be reduced when bids are received from the market, and many risks are eliminated when a final project contracts are signed. Many inherent risks will be eliminated as contracts will include performance and costing benchmarks Further evaluation of the project economics under various contracting approaches to be completed between now and signing of contracts District also has option to re-scope, re-negotiate or abort Project prior to signing the contract Our analysis included consideration of the District s risk exposure before/after execution of a DBO or PPP contract. 38

39 Risk Analysis Results 39

40 A Note on P-values P-values (e.g. P90) represent statistical estimates of uncertainty. Essentially a way to obtain values from what are inherently probability distributions. P90 means 90% of possible costs are less than this value, and 10% are above The P90 value is often used by municipal bodies for valuation of contingent risk in infrastructure projects. P5 and P95 often used as expected range of possible costs However different parties may have a different risk appetite and hence value risks based on different P-values 40

41 Results of Risk Analysis 5 mgd Risk profile of CAPEX contingent risks (Risk Group B) for DBO and PPP 41

42 Results of Risk Analysis 5 mgd Value of risk transfer by PPP Risk profile of CAPEX contingent risks (Risk Group B) for DBO and PPP PPP enables risk transfer in the order of $5 million (P90 valuation) 42

43 Results of Risk Analysis 5 mgd Impact of inherent risks modelled by generating heat maps of Project costs by Monte-Carlo simulations (e.g. 50,000 iterations of possible outcomes) Graph below includes both contingent and inherent risks for DBO: 43

44 Results of Risk Analysis 5 mgd Impact of inherent risks modelled by generating heat maps of Project costs by Monte-Carlo simulations (e.g. 50,000 iterations of possible outcomes) Graph below includes both contingent and inherent risks for DBO: 44

45 Results of Risk Analysis 5 mgd Impact of inherent risks modelled by generating heat maps of Project costs by Monte-Carlo simulations (e.g. 50,000 iterations of possible outcomes) Graph below includes both contingent and inherent risks for PPP: 45

46 Summary of Key Points from Risk Analysis The range of costs (to the District) for the PPP is narrower than for the DBO case, as the PPP accepts more risks. However the PPP has higher financing costs and will likely include a risk premium for this. So, for the most probable outcomes, the NPC and Cost of Water is higher for a PPP than a DBO, but there is less exposure to changes in cost for a PPP if worst cases were to occur. This analysis suggests that it is possible, but unlikely, that a PPP would have a lower cost of water or a lower NPC than a DBO. 46

47 Summary of Risk Analysis Results A PPP reduces risk exposure significantly. However, that saving is not sufficient to counter the lower financing costs for DBO. If the SRF loan was not available, a PPP would appear very similar, and perhaps even more attractive than a DBO. 47

48 Summary 48

49 5 mgd Project: 49

50 Risk Adjusted NPC ~$60M 50

51 Questions? 51

52