Fundamentals of Asset Management. Step 9. Determine Funding Strategy A Hands-On Approach

Transcription

1 Fundamentals of Asset Management Step 9. Determine Funding Strategy A Hands-On Approach

2 Tom s bad day Fundamentals of Asset Management 2

3 Fifth of 5 core questions 5. What is my best long-term funding strategy? Fundamentals of Asset Management 3

4 AM plan 1-step process Develop Asset Registry Assess Condition, Failure Modes Determine Residual Life Determine Live Cycle & Replacement Costs Set Target Levels of Service (LOS) Determine Business Risk ( Criticality ) Optimize O&M Investment Optimize Capital Investment Determine Funding Strategy Build AM Plan 5. What is my best long-term funding strategy? Renewal Annuity Fundamentals of Asset Management 4

5 Asset management investment planning elements Capital investment Renewal (repair, refurbish, replace) Augmentation (capacity, functionality) Maintenance investment Planned Preventive Predictive Life-cycle projected costs Corrective Unplanned Operations investment Operations cost trends Fundamentals of Asset Management 5

6 Renewal programs 1 Average annual annuity existing assets Renewal cash requirements Average annual annuity new assets or services (new LOS) 8 Value, $ Millions Average annual annuity total assets Time Existing assets New work Fundamentals of Asset Management 6

7 Rolling annuities 1 year example Renewal value, $ Time, years Fundamentals of Asset Management 7

8 Renewal - Collection 12 Replacements - Collection System Rehabilitation - Collection System Expenditure - $M (Current Dollars) Year Fundamentals of Asset Management 8

9 Renewal Treatment Plants 35 Replacements - Plants Rehabilitation - Plants Expenditure - $M (Current Dollars) Year Fundamentals of Asset Management 9

10 Total projected renewal costs legacy costs Predicted future renewal of all existing assets 6 CIP - Current Replacements - Total Rehabilitation - Total Expenditure - $M (Current Dollars) Year Fundamentals of Asset Management 1

11 Future Growth and LOS 25 Renew - Future Los/Growth CIP - Future LoS CIP - Future Growth Expenditure - $M (Current Dollars) Year Fundamentals of Asset Management 11

12 Operations and Maintenance 4 35 Maintenance Operations Overhead Book Value Replace Value 1, 9, 8, , 6, 5, 4, 3, Expenditure - $M (Current Dollars) Asset Values - $M 2, 1, Year Fundamentals of Asset Management 12

13 Total projected (optimized) costs 6 12, 5 1, Expenditure - $M (Current Dollars) CIP Existing - Current Program CIP New - Future Growth CIP New - Future Levels of Service CIP - Future Rehab and Replace (New Levels of Service / Growth) CIP - Future Rehab and Replace (Plants) CIP - Future Rehab and Replace (Collections) Operations (Operations) Operations (Maintenance) Operations (Overhead) Book Value Replace Value Average Expenditure 8, 6, 4, 2, Asset Values - $M Year Fundamentals of Asset Management 13

14 Financing strategies Pay as you go current revenues Dedicated reserve account ( hands off ) Replacement/renewal recovery fee embedded in rate structure Pay as you use debt service slice of debt service intergenerational equity Interest as an expense that reduces available capital Fundamentals of Asset Management 14

15 Cash flow projections Fundamentals of Asset Management 15

16 Cash impact by scenario Million Dollars Available annual cash to fund CIP No Rate Increase Full $6 Million CIP Staged Debt Service Without CIP Year Fundamentals of Asset Management 16

17 Projected rates over time by financing scenario 16 Rates ($Annual) /2 2/3 3/4 4/5 5/6 6/7 7/8 8/9 9/1 1/11 Year Fundamentals of Asset Management 17

18 Key points from this session What is my best long term funding strategy? Key Points: Full economic cost is the foundation concept from which effective financial decision-making is made. Replacement and refurbishment cost, not historic depreciation, is key to good financial decision-making Long-term Annualized Renewal Annuity provides the baseline funding for sustained performance. Telling the asset consumption story in simple, effective, big-picture terms sets the stage for LOS discussion and business risk based decisionmaking. Associated Techniques: Valuation techniques Net Present Value Optimized replacement cost tables Optimized portfolio-wide, life-cycle financial projections Capital investment strategies Telling the story with confidence Fundamentals of Asset Management 18

19 Tom s spreadsheet Fundamentals of Asset Management 19