While the usefulness of a utility valuation may now seem clear, how to proceed is often less apparent.
Understanding the right time to use each of the different valuation approaches can help municipalities and utility owners determine their next steps. There are three typical appraisal approaches to take to understand the value of utility systems. Picking the right approach can help municipalities maximize their value. The three approaches are:
- Asset-based valuations. This approach is becoming the standard when it comes to determining value for buying or selling a utility. It explores how much specific infrastructure and equipment is worth based on
current prices to replace the systems, age and asset conditions.
- Enterprise-based valuations. This approach is particularly helpful in determining the revenue-generating potential of certain assets. This insight can help justify added investments. This approach explores how much revenue or cash flow an enterprise generates and the kind of long-term debt or liability the utility holds.
- Comparable sales valuations. This analysis can help determine if the time is right for a sale of assets. It examines the value of similarly situated utilities in similarly situated marketplaces.
BENEFITS OF AN ASSET-BASED VALUATION
In some states, asset-based valuations have become the preferred approach by regulatory agencies prior to a sale. In the past, utility system values were determined by their depreciated original cost. However, states began to recognize the low value derived from this approach presented a barrier to sales and subsequent improvement of these systems.
State legislators are now increasingly shifting regulation to support fair market value pricing, which relies on asset valuation. Today, MORE THAN TEN STATES HAVE PASSED fair market value legislation, and others are
pursuing it. A focus on fair market value can be PARTICULARLY HELPFUL FOR SMALL TO MEDIUM SIZED MUNICIPALITIES seeking to provide safe, clean water to residents at an affordable price. The outcome is usually a much higher value for the utility as a return on their community’s investments.
FIND THE RIGHT PARTNER
The utility valuation process is not straightforward and the shifting legislative landscape makes it particularly important that municipality’s work closely with an experienced valuation consultant. One of the pitfalls municipalities face is opting to work with a consulting firm or attorney with whom they’ve always worked. Municipalities tend do this thinking they’ll benefit from local knowledge. However, the nuances and complexities of this process and the changing marketplace demand a special type of experience and insight.
Ultimately, relying on that local knowledge is going to leave money on the table — bad news for the constituency. It may also mean wasting time and energy running through a process that the state regulatory agency ultimately will stop from proceeding. Experience counts with these types of assessments. It’s not something you can figure out as you go. Before selecting a valuation consultant, consider asking in advance if the consultant:
- Has considerable experience representing buyers and sellers in different situations?
- Has been through adversarial purchases as well as favorable ones?
- Has submitted sworn testimony, and how often?
- Has been subject to cross-examination by regulatory agencies, and how often?
SETTING THE STAGE FOR A STRAIGHTFORWARD PROCESS
With the right approach, and the right partner asking questions and investigating asset value, municipalities can start to feel confident in their utility valuation. We’ll discuss in the next chapter that the municipality has a further role to play in ensuring an accurate valuation.
Click here to download our full utility valuation guide, “YOUR GUIDE TO UTILITY VALUATION: Strategies for Maximizing Your Water and Wastewater Asset’s Value.”