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Intelligent and Sustainable Capital Investment: Financial Analysis and Operational Optimization
Edward C Tifft Jr. Water Supply Symposium | Syracuse, NY | September 21, 2017
Introduction
▪Two Massachusetts Cities’ water utilities were facing:
➢ Significant Capital upgrades;
➢ Institution of long-term capital renewal programs to address aging
systems; and
➢Reluctance to adopt rate increases.
▪What we are going to look at:
➢Look at each utility’s characteristics and needs
➢Review the approach each used to achieve results
➢Discuss take-aways that are applicable for all utilities
Overview – Utilities for discussion
▪Two communities in the Merrimack
River, north of Boston
▪Lawrence Water Department
▪Lowell Regional Water Utility
(serves five communities)
▪Both operate independently, from
a financial perspective
▪Fairly similar systems but different
financial conditions
Common Characteristics
▪How can a utility afford millions of dollars in critical water system upgrades while maintaining rates for residents and businesses?
Intelligent and Sustainable Capital Investment
▪Up Front Financial Analysis➢ Important to think of each utility as a business, but operating with the goal of
efficient delivery of water rather than profit generation
➢Revenue stream Identification and Improvement
➢ Identify and implement available Cost Reductions
➢Understand the incentives available
▪Master Plan / Capital Improvement Planning➢Reprioritization of CIP needs based upon BCA v. criticality on major assets
➢Hydraulic Modeling for distribution improvement
oCriticality Analysis• Likelihood of Failure
• Consequence of Failure
Lawrence Water Works
➢Service Population: 80,000
➢Supply: Merrimack River
➢Average Production: ~7 MGD
➢Operating Budget: ~$9.7 mil
➢Customers: ~18,000
➢“Large” Customers: ~900
Challenges: Costs of Capital Renewal (mains & valves), Fire Suppression Ability
Lawrence – Optimization of Costs and Revenues
Treatment Staff Reorganization
$124,000 annually
Lawrence – Optimization of Costs and Revenues
Chemical Optimization
$460,000 annually
Merrimack Valley Chemical Consortium
KOH → NaOH
Reduce Polymer Dose
Reduce Alum Dose
$190k
$225k
$30k
$15k
Lawrence – Optimization of Costs and Revenues
Backwash Optimization
$800,000 annually
Lawrence – Optimization of Costs and Revenues
Raw & Finished Water Pumps
Before After
horsepower 850 500
MGD 12 8.5
TDH (ft) 303 216
Control Valve VFD
$35,000 annually $440,000 one-time
Lawrence – Optimization of Costs and Revenues
Operational Optimization Measures
$60,000 annually
Reduced UV Setpoint
Adjust Thermostat Setpoint
Energy Efficiency Measures
$10K
$40K
$10K
Lawrence – Optimization of Costs and Revenues
Revenue Optimization – Meter Replacement & Right-sizing
$1,300,000 annually
Lawrence – Optimization of Costs and Revenues
Revenue Optimization – Solar (photovoltaic) Array
$63,000 annually
Lawrence – Optimization of Costs and Revenues
Summary of Optimization Results
ItemAnnual Expense
Reduction
Annual Revenue
Increase
Treatment Staff Reorg $124,000
Chemical Optimization $460,000
Filter Backwash Optimization $800,000
Energy Efficiency $95,000
Water Meter Replacement $1,300,000
Solar (Photovoltaic) Array $63,000
Sub Total $1,479,000 $1,363,000
Grand Total $2,842,000
$2.8M in new
resources
annually on a
$9.7 Million
annual operating
budget
What to do
with the new
resources?
Lawrence – Capital Investment Prioritization
Hydraulic Modeling and Criticality Analysis
➢Water Quality➢Low residual chlorine
➢DBPR
➢Likelihood of Failure➢Pipe Age/Material
➢Consequence of Failure➢Fire flow
➢Critical customers
➢Parcel density
Lawrence – Capital Investment Prioritization
Likelihood Consequence
Composite Criticality
Use of mapping in two ways:
1. Overlay against mapping of non-
operative valves to identify critical
valve replacements
2. Prioritization of main replacement
considering age and other City
activities (i.e. paving & sewers)
Lawrence – Results
➢Combining the findings of an upfront financial analysis with investment prioritization lead to intelligent and sustainable capital investment planning.
➢Allowed for the beginning of a capital renewal program which had a rational basis for scheduling of replacements and would have been difficult to implement without figuring out how to fund the program as part of the process
Lowell Regional Water Utility (LRWU)
➢ Service Population: 105,000
➢ Supply: Merrimack River
➢ Average Production: ~12.5 MGD
➢ Operating Budget: ~ $10M
➢ Customers: ~24,500
➢ “Large” Customers: ~1,300
Challenges: Treatment Plant Investments, Redundancy on Critical Assets, CR
Lowell – Optimization of Costs and Revenues
Pump/Motor Replacements
Before After
horsepower 2,000 2,000
Improved redundancy and VFDs
Control none VFD
$80,000 annually
Lowell – Optimization of Costs and Revenues
Revenue Optimization – Commercial Meters / Right-sizing
$500,000 annually
Lowell – Optimization of Costs and Revenues
Revenue Optimization – Solar (photovoltaic) Array
$125,000 annually
Lowell – Optimization of Costs and Revenues
Critical Redundancy Provision– Raw Water Main
($530,000) annually
Lowell – Optimization of Costs and Revenues
Critical Asset Rehabilitation – Lagoon Cleanout
($63,000) annually
Lowell – Optimization of Costs and Revenues
Critical Asset Renewal – Water Mains and Valves
($190,000) annually
Lowell – Optimization of Costs and Revenues
Revenue Optimization – Residential Meters / AMI
$125,000 annually
Lowell – Optimization of Costs and Revenues
Critical Asset Rehabilitation – PS Rehabilitation
($80,000) annually
Lowell – Optimization of Costs and Revenues
Critical Asset Rehabilitation – WTP Upgrades
($145,000) annually
Lowell – Optimization of Costs and Revenues
Critical Asset Rehabilitation – Residual Lagoon Repairs
($115,000) annually
Lowell – Optimization of Costs and Revenues
Critical Asset Rehabilitation – Reservoir Dam Upgrades
($25,000) annually
Lowell – Optimization of Costs and Revenues
Summary of Optimization and Reinvestment Results
ItemAnnual Expense
ReductionAnnual Revenue
IncreaseAnnual Debt Service
IncreaseLarge Pump / Motor Replacement $80,000
Commercial Meter Replacement $500,000
Solar PV Installation $125,000
Redundant Raw Water Main ($530,000)
Lagoon Cleaning ($57,000)
Water Mains & Valves ($190,000)
Residential Meter Replacement $125,000
Pump Station Rehabilitation ($80,000)
WTP Upgrades ($145,000)
Residual Lagoon Repairs ($115,000)
Reservoir Dam Improvements ($25,000)
Sub Total $205,000 $625,000
Grand Total $830,000 ($1,142,000)
Lowell – Results
➢Combining the findings of an upfront identification of non-core revenue producing projects with a tradition investment prioritization lead to appropriate capital investment planning.
➢On a net basis, the program provided the utility with about 3/4ths of the cash flow necessary to cover debt service associated with critical asset renewal and upgrade projects
➢Intentional scheduling of the projects ensured that revenue streams were accretive before debt service from projects later in the program began to hit the utility budget.
Closing Thoughts
▪Often, utilities are constrained in their ability to do what is needed by financial concerns of ratepayers
▪Most utilities have uncaptured ability to increase revenues in a rate neutral way
▪Outside incentive programs exist that can help improve your operating economics
▪Intelligently ordering a capital program and capturing additional finances can help solve or reduce many of the economic challenges facing utilities
