Optimizing Utility Valuation Using Acoustic Condition Assessment Technologies

There are over 52,000 community water systems (CWS) serving the U.S. population. Over 80% of the CWS are classified as small, serving less than 3,300 people. It’s no secret that CWS assets are in desperate need of renewal, with many systems dating back to the 19th century. Main breaks are appearing with increasing frequency, wreaking havoc on municipalities as pipelines reach the end of their service lives. Repairing and replacing crumbling infrastructure isn’t cheap—the price tag can easily run into the tens of millions of dollars for small townships, and into the billions for major cities. “What’s it worth?” is a question decision makers ask about their assets or business prior to, during, and after a transaction or restructuring. Water systems are no different, given the climate of public private partnerships and private equity transactions combined with municipal restructuring, and state and local mandates to get an appraisal, e.g., Water Infrastructure Protection Act (WIPA) in NJ. The list of parties that need to know what water systems are worth is ever growing, including tax payers, sellers, buy-side investors, and lenders including banks and bond issuers. These parties want a comfort level that a credentialed, independent third party performed appraisal that will withstand scrutiny and provide a figure that makes sense. So how are these aging water systems valued, and how does their condition come into play? There are three elements to determining value to consider: cost, market, and income approaches. All three approaches are not necessarily required; a combination of two (or even one) may be quantified and applied given the needs of a specific transaction. With a water system, the cost approach is typically applied, as these assets are uniquely constructed and configured, and current costs to replace operable assets, e.g., pipes, pumps, and hydrants, are readily available to extrapolate across the system footprint. Water mains are the most critical asset for valuation as they typically represent 75% of the total replacement cost of a CWS. Knowing the condition of the pipes not only helps drive the valuation, but is crucial for planning future capital expenditure (CAPEX) investments. To determine the remaining service life of buried water mains, the true condition (level of deterioration) is required; this can be cost-effectively quantified from non-intrusive, non-invasive acoustical testing. In most historical water system valuations, the service life of buried assets is assumed “expired,” leaving significant dollars on the table.