Capital Renewal

1Presented at IFMA Utilities Council, March 26, 2010 by B. Lambe

Capital Renewaland Impact on O&M Expenses

IFMA Utilities Council Spring Meeting

March 2010


Source: Building Operating Management magazine, February 2010

Capital Renewal is More Than O&M Impacts


Presentation ObjectiveThere is believed to be a relationship between capital re-investment and O&M (Expense) costs, but it is not well quantified:• Specific capital investments to reduce labor

(technology, equipment) have clear O&M savings.

• Specific capital investments in a property can reduce some O&M costs (repairs, energy).

• Some customer satisfaction issues seem to be related to age/condition of the facilities (appearance of cleanliness) and may impact spending in these areas.

• Some capital investments made to improve sustainability of the facilities also impact O&M costs.

This presentation explores some basic issues and trends associated with capital investment in property.

Background:

The IFMA Utility Council has been a forum for sharing practices for many years.

Expense spending and O&M costs are discussed at every meeting and are part of annual benchmarking.

Capital spending is discussed from time to time but traditionally not part of benchmarking.

Many companies are experiencing budget pressures and capital investment in facilities need to demonstrate clear value.


Capital Re-investment Issues Re-investments justified by “engineering” analysis can gain approval:• Limited number of

properties can be assessed within budgets.

• Projects often need to meet quick payback or high ROI goals.

Many companies able to quantify asset health with condition index.• Deferred maintenance

remains an issue in many areas.

Capital funding has become scarce.• Funding environment is

more difficult than it used to be.

• Property investments may not compete well with other business imperatives.

Sustainability has created new needs.


Savings Exist Upon AnalysisSpecific Site “Audits”Identify Where:

Capital investment can reduce O&M (repairs).Capital investment can reduce O&M (energy).Planned capital investment can reduce “reactive”capital spend and extend life of assets.

Source: PRES Services, Facility Energy & Sustainability Audit,www.PRES-Services.com


Assets Have Somewhat Predictable Lifespan

Source: SRP Building Condition Assessments presentation, from chart developed by FM Solutions

Source: Next Generation Building Asset Management Approach Saves Money by Jim Clayton & Donald Uzarski, Unity Consultants, IFMA Webinar, January 19, 2006

Should be able to project likely capital re-investment based upon lifecycle and condition (for ongoing use).

By property, building system, component.Should be able to plan desirable capital re-investment based upon projected need for the asset.


Use of Condition Assessments is Increasing

Fall 2008

Spring 2008

This group has had several presentations in past 7 years on condition assessments/audits.FCI (Facility Condition Index) is a key metric for this but not a KPI for most companies.


Funding Categories

New assets with multi-year useful life.Investment to replace asset or significantly extend useful life.Investment to “re-purpose”assets.

Operation of assets.Ongoing maintenance of assets.Return on asset investment (depreciation).

Non-annually recurring costs.Significant maintenance repairs – either emergency or scheduled.Enhancements to asset life.

CapitalCapital Renewal &

Extraordinary Expense

Expense

Related more to portfolio changes

Spending related to property operations (run the business)

Capital vs. Expense based on accounting


Some Variation Due to Accounting Rules

Accounting rules by company define “units of property” for plant assets.Accounting rules (SEC, IRS, regulators) define boundary between capital & expense.Definition of some costs (capital renewal vs. extraordinary expense) will vary by company.


Capital Availability Impacted by Market

Ability/desirability of raising capital is influenced by stock rating, set by a number of financial “tests”.Projected revenue & spending, EPS, & other factors contribute to favorableratings, which:• Minimizes cost of new debt.• Avoids adverse triggers/penalties.

Utilities also experiencing reductions in allowed ROI during recent rate cases:• Unknown if this will cause negative

perception of stock value for investors (vs. other investments).


Competing Demand for CapitalUtilities are Capital Intensive Companies:• Aging distribution networks.• New transmission needs.• Pressure for greener production:

More production anticipated to meet demand.Strong interest in new renewable sources.Carbon/Cap & Trade costs anticipated.

• IT/technology improvements.• Large fleets of vehicles.• Property and buildings.

Clear Value Proposition Required to Obtain Funding for Property.Not Sure About Concern for Future Capital Needs to Address Increase in Deferred Maintenance.


The Challenge…

O&M$

HighLow

FCI

High

Low

Low

High

Sustainability

Low Cost(Per Cust. Sat.)

DoingRight Things

(“Green”)

Doing Things Right (Asset Health)

What are the most favorable spending patterns for ongoing Capital Renewal AND Expense?How to get sustainability as well?


Good planning starts from business objectives. Typical business goals relevant to property are:• Effective (support safe and productive

operations).• Efficient (cost management).• Other (e.g. sustainability, image).

Key annual capital planning issues for facilities are:• What investment is “required” to

maintain minimum asset quality?Mission readiness of properties.

Condition vs. “standard” (deferred maintenance).

• What investment provides the most favorable financial return?• What investment required to achieve sustainability objectives?• What investment is required for desired business re-configuration?

Need to be focused in light of limited funding.

Rational Capital Planning


Focused Capital Re-Investment

Properties that are:• Business-critical.• Expensive.• Long-term & stable.

Maintain asset health:• “Regular” assessments

appropriate for life cycle.• Reinvest to maintain

overall FCI.

Reconfigure for more efficient operations.

Properties that are:• Low value.• Likely to be abandoned or

reconfigured before anticipated end of useful life.

Operate “break/fix”• Assessments only when

warranted.• Reinvest when clear

financial advantage.

Proactive Re-Investment Reactive Re-Investment


Nature of This Year’s Capital Budget?

15

Emergency Repairs, 6%

Planned Repairs, 25%

Energy/ Sustainability

Work, 6%

Renovations, 32%

New Projects,

31%

QUICK SURVEY

Total Facilities Management Capital Budget, current fiscal yearUnscientific Poll of Meeting Attendees


0% 20% 40%Percent of Companies

Large Decreases (>15%)Small Decreases (0-15%)

About EvenSmall Increases (0-5%)Large Increases (>5%)

Changes in Renewal Capital Budget?

For Facilities-Related capital budgets last year to current year, not including large line-item projects (new facilities/major renovations)

QUICK SURVEY

Unscientific Poll of Meeting Attendees


How Do You Use FCI?

17

QUICK SURVEY

Unscientific Poll of Meeting Attendees

0% 20% 40%

No FCIAge-Based or Tabletop

Did One Inspection CycleAnnual Inspection Program

FCI Linked to KPI

Including any type of quantitative score for facilities’ condition.

Percent of Companies


About the PresenterBob Lambe has worked on facility projects for more than 20 different utility companies including over 15 years with Niagara Mohawk/National Grid.

www.linkedin.com/in/lambe

Documents

Capital Renewal