Goose Creek Water Treatment Plant Water Treatment

Assessment and Financial Evaluation

September 20, 2011

City of Fairfax Utilities Department

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City Council Goal No. 2 (2010-2012)

“Develop cost scenarios for future water treatment alternatives to enable the City Council to determine the most efficient and effective long term water treatment options.”

Adopted October 10, 2010

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AGENDA A. Purpose of Work Session B. Introductions C. Assessments & Capital Needs

1. Intake, Safe Yield and Dams Assessment 2. Treatment Assessment and Upgrade Program 3. Transmission Main Assessment 4. Market Analysis of Land Assets 5. Risk Considerations

D. Financial Analysis of Alternatives E. Review by City’s Financial Advisor

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A. Purpose of Work Session 1. Summary Assessments & Cost Scenarios using: Capital Cost Estimates Comparison of Projected User Rates

2. Select 2 Alternatives for further detailed evaluation: Stay in Water Treatment Purchase from Fairfax Water Both: Full Service Area

w/ Redundancy

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B. Introductions

Dick Dyne – Design-Build Manager (CH2M HILL) Mike Matichich – Financial Analysis (CH2M HILL) Mark Notheis – Project Engineer (CH2M HILL) Jimmie Jenkins – Consulting (CH2M HILL) Aaron Keno – Water Source & Dams

(Gannett Fleming) Lauren Sufleta – Transmission Main (City) (WRA) Bob Woodruff – Land Use Valuation

(William H. Gordon & Assoc.) David Rose – Financial Review (Davenport)

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C. Assessments & Capital Needs

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Accuracy Increases

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The “envelope” of accuracy in estimating construction costs

Actual Bid(s)

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C.1 – Intake, Safe Yield and Dams Assessment

• The Intake is on Goose Creek – Intake baskets; manually cleaned – Single 24-inch pipeline to wet well

• Goose Creek is subject to siltation – Reservoir was 200 million gallons (MG) in 1980

and was restored to 200 MG again in 1997 – Current reservoir is approximately 120 MG

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Safe Yield

• The Safe Yield of Goose Creek and Beaverdam Creek Reservoir is 9.9 million gallons per day (mgd) – Recent hydrological and safe yield study by

Gannett Fleming – Adequate capacity for City Service Area for the 20

year period – Subject to water conservation and manual refill

operations

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Goose Creek Dam

• The concrete Dam at Goose Creek is in good condition.

• Limited dredging is planned. • Rehabilitation is expected to be composed of

new drain valve; seepage monitoring; and other minor changes.

Capital Costs are estimated to be $1.25 M

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Beaverdam Creek Dam • The earthen Dam at Beaverdam Creek is

homogeneous and in good condition. • New legislation (Code of VA; 10.1-605) (2010)

requires a new or expanded spillway and outlet system.

• Monitoring systems will be provided this year.

• Capital Costs are estimated to be $11.6 M

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Major Improvements Required: - Outlet Capacity - Channel Capacity & Stability

Weathered Rock

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Spillway, $8.6

Embankment, $2.5

Dredging, $1.0

Other, $0.8

Improvements to Dams $ 12.9 M

C.2 - Treatment Assessment and Upgrade Program

• Source is Goose Creek with a side-storage reservoir (Beaverdam Creek) for low stream flow periods.

• Treatment includes 9 different chemicals, sedimentation, filtration and disinfection.

• Single Transmission Main to City is 22 miles

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Raw Water Pump Station is constructed on the shore of Goose Creek with one intake approximately

120-feet off-shore.

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Original plant commissioned in 1961. The major upgrade and expansion was in 1981.

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Plant is limited to the conventional process that meets current SDWA requirements.

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Most of the chemicals used for treatment will be consolidated in a new Chemical Feed Building.

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Raw Water P.S., $4.1

Chemical Building, $6.1

Generators, $1.3

New Flocculator,

$1.0

Other, $4.3

Treatment Plant $ 16.8 M

The Planning Estimate: for 22 scope items

C.3 - Transmission Main Assessment

• P-Wave – 12,000 LF of Electromagnetic Investigation – Pipe condition (structural, i.e., wire)

• Three (3) broken wire sections identified: 1. 50-inch 2. 25-inch 3. 10-inch

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• Smartball – 66,500 LF of Ultrasonic Sound Investigation – Two (2) leaks detected

• An air valve to be replaced • Other not easily identified

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Transmission Main is in good condition

Capital Costs are estimated to be $0.325 M

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Dams, $12.9

Treatment, $16.8

Transmission, $0.3

Treatment Program $ 30.0 M

C.4 - Market Analysis of Land Assets

• Plant and Reservoirs are on the edge of the Loudoun County Transition Policy Area (TPA)

• Land is zoned as Industrial and low density Residential

• Land has limited frontage • Land is inefficient; subject to flood plain and

deep setbacks

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DULLES AIRPORT

TOWN OF LEESBURG

GOOSE CREEK TREATMENT

PLANT

BEAVERDAM RESERVIOR

SUBURBAN POLICY AREA

TRANSITION POLICY AREA

TR-10 ZONE

PD-GI ZONE

PD-IP ZONE

MAJOR FLOODPLAIN

MAJOR FLOODPLAIN 300’

SETBACK 100’

SETBACK

300’ SETBACK

MAJOR FLOODPLAIN

100’ SETBACK QUARRY

NOTIFICATION OVERLAY DISTRICT

TR-10 ZONE

R-1 ZONE

TR-10 ZONE

300’ SETBACK

MAJOR FLOODPLAIN

Maximum Theoretical Density under Perfect Conditions (By-Right)

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Zoning

Net Area Dwelling

Units

Area (FAR= 0.4) X

1,000

TR-10 144.2 14

R-1 88.1 88

PD-IP 19.3 336

PD-GI 84.2 1,467

C.5 – Risk Considerations

• Reliability – Power Failure – The 2-Year Drought – Lack of Redundant Conveyance – Limited Fairfax Water Emergency Agreement

• Cost Uncertainty – Employment – Energy

• Compliance with SDWA

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All manageable except:

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Lack of Redundant Conveyance

Introduce Option 1B = 1A with Redundancy

New Submersible Raw Water P.S. (Add-in) $ 1.18 M Pump-back Improvement at Beaverdam Creek

$ 1.30 M

Raw Water Force Main $ 0.78 M Emergency Connection $ 1.00 M Transmission Main in County $ 11.22 M TOTAL – Redundancy Program $ 15.5 M

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D - Financial Analysis of Alternatives

Options were developed through a participatory process that included: – Loudoun Water – Fairfax Water – Falls Church – Consultants for each Discipline – City Management

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Five Options Were Developed & Evaluated

• Option 1A: City Stays in the Water Treatment Business • Option 2A: City Purchases Capacity from Fairfax Water (In-

City only) • Option 2B: City Purchases Capacity from Fairfax Water (Full

Service Area) • Option 2C: City Purchases Capacity from Fairfax Water (Full

Service Area less County Residential) and later: • Option 1B: City Stays in the Water Treatment Business with

Redundancy

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Order of Magnitude Valuation of City Assets

• $ 10 M for 620 Acres at Reservoir • Unknown Market Conditions at Plant • $ 5 M for Transmission Main to Loudoun • Up to $ 15 M for Transmission/Distribution

and partial storage at University Tank • Conclusion: Assets are not of high values

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Factor Options - Treatment Only 1A 1B 2A 2B 2C

Max. Day 10.0 MGD

10.0 MGD

7.0 MGD

10.0 MGD

8.5 MGD

Capital Costs $ 30.0 M $ 45.5 M $ 31.5 M $ 45.0 M $ 38.25M

Potential Sales N/A N/A $ 30.0 M $ 15.0 M $ 22.0 M

Bond $ 30.0 M $ 45.5 M $ 1.5 M $ 30.0 M $ 16.25M Median

User Rate $6.77 $7.47 $7.31 $6.70 $6.94

Table excludes Inflation for User Rate Median User Rate demonstrates impact to customer

City still borrows money for Line Maintenance

Financial Model Assumptions

• 20 year solution • 30 year borrowing at 6.0 % • Best available estimates in today’s dollars • All Capital Costs are bonded • Purchase Price for Fairfax Water supply = $4.5M per MGD • Treatment Costs for Fairfax Water = $1.20 per 1,000 gallons purchased • Loss of Loudoun Water by 2018

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Factors Used to Illustrate Inflation

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Component Standard Factor Labor ECI 3.0 % Fixed Costs CPI-Urban 2.5 % Variable Costs CPI-Urban 2.5 % Capital Expenses ENR - 10 3.7 % Future Debt Service 6.0 % Wholesale Water Price 4.0 % Increase in Consumption 0.0 % Availability Fee Revenue Zero

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$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00 R

etai

l Rat

e ($

per

Kga

l)

Alternative Comparison ($ per Kgal) Inflationary

Alternative 1A - City Stays in Water Treatment Business

Alternative 2A - City Purchases Capacity from FW (In-City only)

Alternative 2B - City Purchases Capacity from FW (Full Service Area)

Alternative 2C - City Purchases Capacity from FW (Full Service Area less County Residential) Alternative 1B - Ciy Stays in Water Treatment Business with Higher Reliability

E - Peer Review of Financial Analysis

• Davenport & Company LLC, in our capacity as Financial Advisor to the City of Fairfax, has attended meetings, provided input on Key Assumptions, and reviewed the five options prepared by the City’s other Key Utility Advisors.

• Davenport’s goal was to provide insight on key assumptions in order to further refine the relative Cost / Benefit Analysis of the options.

Initial Observations

• Capital Related – Retaining ownership of the entire system (i.e. Option #1B)

will require the City to make considerable capital investments over the next several fiscal years (i.e. $34 million between fiscal years 2012 and 2013 alone and $48.5 million total by fiscal year 2016).

– That said, under all other options, the City will still need to make a substantial capital investment by fiscal year 2016.

Projected 5 Year Capital Requirements • Given the uncertain nature of the revenues from sale of

assets in Options #2A, 2B, and 2C there is risk that the amount of capital the City will need to fund with new borrowing could be greater.

$0 $10 $20 $30 $40 $50 $60

2C

2B

2A

1B

1A

Millions

Projected 5 Year Capital Requirements

Capital Requirements net of Estimated Asset Sales

Estimated Asset Sales to Offset Capital

Projected 20 Year Capital Requirements

• After fiscal year 2016 all of the options require approximately the same capital per year. As such, total projected capital needs over a 20 year period are within the same order of magnitude for each option.

$0 $20 $40 $60 $80 $100

2C

2B

2A

1B

1A

Millions

Projected 20 Year Capital Requirements

Capital Requirements net of Estimated Asset Sales

Estimated Asset Sales to Offset Capital

Debt Structuring

• For purposes of initial modeling all options assume that new debt is repaid at a 6% interest rate with 30 years of level annual debt service.

• Thus, under all scenarios, there is the ability to incorporate strategic debt structuring to lessen the budgetary impact of new debt as well as the ability to obtain a lower interest rate (based on current market conditions).

Summary Observations • When viewed on a projected user rate basis, Option #1B (i.e. retain

City ownership) is approximately 10% to 12% more costly than options 2B and 2C (i.e. the lowest cost of the “sell the system” options) after the loss of Loudoun Water as a wholesale customer is fully incorporated (i.e. 2018).

• That said, the water rate per 1,000 gallons for Option #1B is higher than Options #2B and 2C by approximately 75¢ per 1,000 gallons. – For a customer that uses 5,000 gallons per month this equates to a bill

that is approximately $3.75 higher per month with Option #1B than with the Options #2B or 2C.

Summary Observations (cont.)

• After 20 years (i.e. 2031), the City still retains ownership/control over substantial assets under Option #1B.

• Assumptions as to the disposition of City assets are uncertain (i.e. sale of the reservoir, sale of land to other entities). As such, the relative cost/benefit could be more (or less) favorable toward Option #1B.

Summary Observations (cont.)

• The City will retain the greatest amount of control with Option

#1B.

• With that control also comes a greater concentration of risk as it relates to primary ownership of the reservoir, dam, transmission main, etc. and potential equipment failure risk, regulatory risk, etc.

Questions ? Course of Action ?

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