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October 19, 2016
Assessing and Valuing Water Systems Featuring Senior Director Anthony Festa and Director Robert Pay
Business Intelligence
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Robert: Anthony, thank you for joining us today. Can you give us an overview with what is happening with water infrastructure in the U.S?

Anthony: Thanks for having me Robert. Water infrastructure today in the U.S is basically aging infrastructure. We are talking about water systems that are above and below ground that need to be replaced, need major repairs and have parts of their systems that was installed in the late 19th to the early 20th century . When I talk about these systems, I’m not just talking about buried - distribution or pipes that run from treatment plants to end user customers but there are pump houses, waste water treatment facilities etc. So, there is a lot of crumbling infrastructure out there and when we talk about this infrastructure and the money behind it, we are talking about tens of millions of dollars for small townships and into the billions for major cities.

Robert:  Why is getting a third party valuation for a water system important?

Anthony: When you are talking about large sums of money you are going to have a number of interested parties. One of the biggest parties you will have is your tax payers; you have investors, both on the buying side and the lending side whether or not they are lending money from banks or bond issuers.  These parties want to have a comfort level that an independent third party came in, that is credentialed, and did an appraisal that will withstand scrutiny and will provide a figure that makes sense.

Additionally if there is the sale of an asset, whether or not it is full or partial, it will trigger for financial reporting purposes – a purchase price allocation. So, an appraisal will be needed and it will be required by the accountants or auditors of the acquiring company.

Robert: What are the key challenges of valuing water infrastructure?

Anthony: I think the largest challenge is understanding what’s out there.  Most of water systems are buried, probably about 75% is underground, you can’t see it, and it may be incomplete and at times there are no maps. It’s not like walking outside, seeing a bridge and there is your asset. With water infrastructure it is a lot tougher. So that is probably one of the largest challenges because when you cannot see the asset, you cannot assess the conditions.  In situations like that, we work with 3rd parties like Echologics that use acoustical testing to non-invasively test and feed us information to tell us what condition the pipes are in and how much deprecation of wear and tear we should apply, which is a factor  in determining value.

Robert:  What approach would you take to valuing a water system?

Anthony: As an appraiser, you always need to consider all three approaches to value which are:

  • Cost
  • The Market
  • Income

Typically with a water system, I would dispose of the market approach, because these assets/systems are unique. Unlike Kelly Blue Book where you look up the value of your car where there are a lot of comparable sales out there, you don’t have that with water systems. When it comes to the income approach, it is a viable option, but it only works if there is quantitative financial information available such as projections that you can apply to your system. I would rely on the cost approach. The cost approach is based upon the principal of substitution that a prudent investor wouldn’t pay more for an asset today that the costs to reproduce or preplace that asset and make adjustment for deterioration and obsolescence.

Robert: You mentioned financial data, surely a major assets such as a water system is going to be somewhere on a balance sheet. Why wouldn’t you simply use net book value on which to base your estimate?

Anthony: Using net book value is not a good proxy for fair value or fair market value. Net book value just recaptures the cost of an asset over time for accounting purposes. With older systems, like those we are talking about, these would typically have a net book value of zero on financial books whereas  because they are operating  and still in existence,  there is an intrinsic value there as an operating system.

So, fair market value may not be reflective of what the net book value is. In addition, you also have to take a step back and ask the question how was the data recorded and how was it capitalized? Yes,  net book value  could be on the balance sheet  and that information is a function of  the fixed asset  but  if expansions to the system was not recorded over time or there have been  write offs  then there could be an issue with what that balance sheet netbook value  is capturing.

Lastly, when we talk about these systems you have to ask yourself the question how could a potential buyer or seller measure the condition which again is a function of value, if they cannot see the asset? In working with  partners such as Echologics  they can go in and  look at the condition  of those  systems and give us  that input and help  capture  a more accurate value for that asset.

Robert: Anthony, thank you very much indeed.

Anthony: Thank you for having me.