Once the municipality or private utility has established its goals and selected a partner, it’s time to begin the legwork for the actual valuation process. This investigation will uncover all assets and explore as-built and current replacement costs.
While many municipalities are content to turn this process over to their consultant in its entirety, initial input from the local experts who know these systems best can make the process quicker and ultimately more accurate. Input from current utility engineers and operators is particularly valuable. Long-tenured field staff or superintendents often hold in their memory much of the history of their utility systems. Cross-checking data with accounting staff also can prove helpful. Providing time for municipal staff to contribute to the investigation gets the valuation off to a strong start.
ASSESS THE ASSET INVENTORY
The first step of the valuation process is to assess the municipality’s asset inventory. The process starts by creating a comprehensive listing of all the underground piping, manholes, fire hydrants, valves, aboveground structures, buildings, vehicles, and so on — all of those components that make up the water, sewer or other utility. While the valuation team can create this list, the project may move along much quicker if the utility is able to provide at least some of this information. From there, the team conducting the valuation will make site visits. Often the result is a map of the assets, complete with detailed descriptions of component age, material, size, and condition.
CONDUCTING DUE DILIGENCE
If the client does provide an asset inventory, the valuation team should still spend a considerable amount of time performing due diligence to make sure it’s a complete and accurate list. Part of the valuation work is finding overlooked assets or structures that may not be listed correctly in documents. This is particularly common for buried assets. It’s tough to remember where everything is, particularly when some of a municipality’s assets were buried decades ago. Due diligence should involve both verifying provided information and drilling down further into the details of those assets.
ASSESS COST INFORMATION
The next step is to assess cost information. This involves looking at site- or community-specific information on what the listed assets cost when they were originally installed in their current location, whether that be in the 1890s or the 1980s. The consultant will use whatever information is available to establish the cost of those assets at the time they were installed. This may include material costs as well as costs of engineering, permitting, easement rights, legal fees and the like.
At the same time, the valuation team will gather information via modern construction costs and indexes to understand what that same type of infrastructure would cost to construct and install today should those assets be replaced. This method accounts for the current cost to design and build new facilities similar to the existing systems with equivalent functionality but necessary technological and regulatory modifications.
In some cases, the team may look for current cost indexes across various communities — the costs in New York versus the cost for that same infrastructure in Ohio, for example — to help in assigning costs to each inventoried asset. The next step is to look at depreciation. After all, an asset that was installed 50 years ago is not as valuable as an asset that was installed 10 years ago due to wear and tear. In some cases, the infrastructure may be functionally obsolete but still may have value.
TIME TO DRAW CONCLUSIONS
With this data in hand, it’s time to draw some conclusions on value. Typically, the valuation team will focus on three numbers to create a range of valuations:
- The original cost of all the assets in the years that they were installed.
- The replacement cost of what each asset would cost if it were to be installed today.
- The replacement cost less depreciation.
Together, this information provides a final conclusion on value and gives a client certainty in the value of its utility assets.
Click here to download our full utility valuation guide, “YOUR GUIDE TO UTILITY VALUATION: Strategies for Maximizing Your Water and Wastewater Asset’s Value.”