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2009 MMWC Annual Meeting Table of Contents 1. Brief summary of how MMWC is addressing infrastructure and budget issues 3. What kind of capital improvements does MMWC need? 4. Why wasn't more done in the past?
5. How have MMWC's unsustainably low rates affected its balance sheet?
6. How have MMWC's unsustainably low rates affected its capital expenditures?
7. Can't MMWC trim its budget in other ways to avoid a rate increase? 9. Does MMWC need to increase capital expenditures this much? 11. How does MMWC's 2009 budget compare with MMWC's 2008 actual expenses?
12. How have MMWC's operating expenses changed over time?
Brief summary of how MMWC is addressing infrastructure and budget issuesAt the 2009 Annual Meeting, the members of MMWC voted in favor of a special assessment in 2009 and a rate increase, effective Jan. 1, 2010, to fund the company's operation and capital costs. (For an update on what happened at the meeting, see http://ccmewater.blogspot.com). Here is a brief summary of what MMWC is doing: 1) On February 23, 2009, the Board approved a budget that increased MMWC's allotment toward building capital reserves and/or making capital expenditures to $100,000 -- a $60,000 increase over last year's capital budget. For an overview of MMWC's infrastructure needs, read some of the 2008-era minutes of the Board of Directors; see the "Infrastructure" page; and view the slideshow presentation. 2) On February 23, 2009, the Board also approved a resolution requiring that all users be metered by the end of 2011. 3) On February 23, 2009, the Board approved a resolution raising the membership fee (for a CCME lot whose appurtenant membership has been forfeited) from $3,000 to $8,000, effective January 1, 2010. 4) On March 21, 2009, the Board proposed, and the membership approved, a special assessment on MMWC's members and customers of $80, in order to close this year's operating budget deficit and also fund capital improvements. 5) On March 21, 2009, the Board proposed, and the membership approved, raising availability fees from $90/year to $150/year and residential user fees from $35/month to $50/month (for non-metered users) or $25/month + $0.005/gallon (for metered users, but with total monthly bill temporarily capped at $50/month). Why all of this action, why now, and why a special assessment and rate increase after the $10/month increase in user fees in Sept., 2008?MMWC has reached a moment of compelling necessity. In 1983, MMWC inherited a substandard transmission and distribution system. Since that time, some of those problems have been addressed. But many of them still persist. For more information, please visit MMWC's "Infrastructure" webpage. Now, over a quarter of a century later, the growth in CCME's population, together with the wear and tear MMWC's system has incurred over that time, will not permit MMWC to defer addressing its still-persisting infrastructure problems any longer. The increase in user rates from $25/month to $35/month in Sept. 2008 was an emergency measure that reduced -- but did not close -- MMWC's budget gap. In all, the measure increased MMWC's annual operating revenues by about $39000. The rate increase, which applied only to MMWC's user customers, was not even sufficient to cover MMWC's operating expenses, much less to fund much-needed capital improvements to MMWC's transmission and distribution system. Astonishingly -- as various graphs below illustrate -- MMWC operated on negative cash flows almost every year since 1990. MMWC managed to operate in the red for so long for two reasons: (1) in 1990, MMWC's inflation-adjusted reserves were approximately $500,000, and MMWC not only spent the interest those reserves generated, but also spent the principal to fund its operations; and (2) over the past decade, MMWC slashed spending on capital improvements, deferring those projects for another day. The two factors that enabled MMWC to keep its rates so low for so long are gone: (1) MMWC has almost exhausted its reserves, so MMWC no longer earns much interest, and there isn't much principal left to spend; and (2) MMWC will face a water crisis more severe than what it experienced in the winter of 2008 if it continues deferring spending on capital improvements. MMWC's members and customers have long enjoyed some of the lowest rates charged by a rural water provider. Even after all of the changes MMWC is making, MMWC's members and customers will continue to enjoy lower rates than what most other rural Teller County residents pay. To understand the history behind and depth of the budget problems MMWC faces, and why MMWC must make the changes it is making, keep reading. What kind of capital improvements does MMWC need?Currently, MMWC serves CCME through a 3", schedule 40 PVC transmission line that Golden Cycle Land Corp. installed in the early 1970s. The small diameter and relatively small wall thickness greatly restrict the volume and pressure with which water can be pushed through the system. That flow rate is inadequate at times to serve all of MMWC's needs without alternately shutting off different parts of MMWC's distribution network. Moreover, service to the entire CCME community must be interrupted to service user connections along a large section of that line. Overall, MMWC's distribution network is becoming increasingly difficult to manage in way that can satisfy the increasing demands of CCME's growing population. MMWC urgently needs to complete a 6" transmission line from its wells to its main water storage tank on the southeast slope of Rhyolite Mountain and build a new 6" transmission line from that tank to a centrally-located tank in MMWC's distribution system. These improvements would greatly alleviate the inadequate capacity and pressure problems with which MMWC has struggled over the last 2-3 years. For a description of some of these problems, read some of the 2008-era minutes of the Board of Directors. The cost of installing these transmission lines is likely to approach $250,000. Why wasn't more done in the past?Because for decades, MMWC' directors single-mindedly sought to keep rates as low as possible. Over the past 10-15 years, that single-minded focus came at the expense of MMWC's infrastructure and balance sheet. MMWC kept the user and availability fees that it had set, in 1981, at $20/month and $75/year, respectively, the same for 22 straight years. Between 1981 and 2003, inflation eroded more than 50% of the dollar's value. By not raising rates, MMWC effectively cut its rates -- in real, inflation-adjusted terms -- in half.
Fig. 1: Graph of CPI-Adjusted User & Availability Fees, 1981-2008 Since 2003, MMWC has raised user fees twice -- to $25/month in 2004 and again to $35/month last year -- and availability fees twice -- to $80/year in 2003 and $90/year in 2007. But the increases have been too little -- by far -- to permit MMWC to invest in much-needed infrastructure improvements. MMWC's user rates are artificially low when compared to rates charged by other water providers in Teller County, Colorado. Click this link to compare rates charged by four other Teller County water providers. Astonishingly, MMWC's rates are so low that they rival the fees charged by community-owned Colorado Springs Utilities. According to CSU's website, CSU charges an average residential water user (who consumes 1100 cf/month) $35/month if they live in the city and $52 if they live outside the city limits. But CSU has a vastly superior economy of scale -- about 73 taps for every mile of mains. MMWC, by contrast, has only about 5 taps for every mile of mains. How have MMWC's unsustainably low rates affected its balance sheet?Between 1982 -- when MMWC served fewer than 60 connections -- and today -- when MMWC serves over 320 connections -- MMWC's inflation-adjusted revenues declined. Over the same period of time, MMWC's inflation-adjusted operating expenses went up, but only modestly so, and well below the growth rate of the population CCME serves.
Fig. 2: Graph of CPI-Adjusted Operating Revenues, MMWC's unsustainably low rates have resulted in operating budget deficits for most of this decade, greatly depleting its reserves.
Fig. 3: Graph of CPI-Adjusted Budget Deficits, 2000-2008 But MMWC cannot sustain negative cash flows much longer. MMWC's reserves are almost gone. Indeed, between 1986 and 2008, MMWC's inflation-adjusted reserves plummeted by more 75%, with most of that drop occurring in the last six years.
Fig. 4: Graph of MMWC's Reserves (CPI-adjusted), 1981-2008 MMWC simply must raise rates to stay solvent and maintain and improve a reliable central water distribution system for CCME. How have MMWC's unsustainably low rates affected its capital expenditures?As a result of MMWC's ever-tightening budget constraints, MMWC dramatically reduced its capital expenditures from an average, in inflation-adjusted terms, of over $80K/year during the 1982-1998 period to an less than $30K/year during the 1999-2008 period.
Fig. 5: Compare MMWC's Capital Expenditures for Periods 1982-1998 and 1999-2008 Meanwhile, MMWC's service population has grown, its distribution and transmission network has aged, and the need for capital improvements has become urgent. Can't MMWC trim its budget in other ways to avoid a rate increase?No. Every year, MMWC works very hard to cut costs and minimize its operating expenses. For example, just recently, MMWC switched to a more cost-effective health insurance plan. And if you ever get to know MMWC's staff, you will find them to be exceptionally frugal and resourceful. As a practical matter, there is very little if any room to cut expenses further. MMWC has operated on a very frugal, barebones budget for years. MMWC's financial statements -- which go back to the early 1990s (and upon whose data the graphs in this webpage are derived) -- bear this out. In 1993, MMWC purchased a backhoe so that its employees could perform much of the upgrades and maintenance on MMWC's infrastructure themselves, rather than hiring out the work to third party contractors. Its office building -- pictured here -- was built in 1938! MMWC also maintains a very frugal budget for office equipment. Over 60% of MMWC's 2008 expenditures were payroll-related. Another 12% went to energy expenses. Another 4% was for business insurance. (See budget graphs further below). This left very little for everything else -- well maintenance, pipe maintenance, truck maintenance, backhoe maintenance, water truck maintenance, building maintenance, etc. MMWC's budget is already cut to the bone. A few members have suggested that MMWC should slash employee salaries instead of raising rates. But MMWC's employees' salaries and wages are at or a little bit below median salaries, and have increased by only about 1%/year, in inflation-adjusted terms, between 1997 -- the year the most junior of MMWC's employees was hired -- and now. Notably, over that same period of time, there has been a 50% increase in MMWC's user base. Also, MMWC would have to cut employee compensation by over 70% -- and hope that its employees would overlook the insult and be willing and able to work for practically nothing -- in order to close its budget gap and raise the money necessary to fund its capital improvement projects. This is not a realistic solution to MMWC's budget needs. MMWC's membership has a choice. One course is to reflexively oppose any and every rate increase, regardless of its merits, and insist that MMWC make only band-aid responses to MMWC's critical and long-deferred infrastructure needs. Such a course will put MMWC at significant risk of not being able to consistently supply water to all of its members and possibly -- as early as the end of next year -- insolvency. Another, wiser course, is to face MMWC's problems with realism, responsible fact-intensive analysis, fiscal discipline and prudence. Colorado residents, particularly in rural areas, must value, guard with diligence, and not take for granted the pristine water available to them. MMWC's members' relatively senior water rights alone are likely worth many millions of dollars. There are many savvy, sophisticated buyers in the market who would be thrilled to take over MMWC's water rights -- leaving CCME high, dry, and desolate -- should MMWC be allowed to fail. What will the special assessment and rate increase do to address MMWC's infrastructure and budgetary problems?MMWC anticipates that the 2009 special assessment will raise approximately $100,000 in additional revenues. The additional funds will enable MMWC to increase the amount of its budget allocated to transmission line maintenance and capital improvements to about $100,000. Click here to view a copy of MMWC's 2009 Budget. MMWC conservatively expects (on the basis of a sophisticated spreadsheet analysis) that the rate increases, which would become effective on Jan. 1, 2010, will continue to raise at least an additional $90,000 over MMWC's current revenue stream. The additional funds should enable MMWC to continue budgeting at least $90,000 per year for pipeline maintenance and improvements and to rebuild its capital reserves. Does MMWC need to increase capital expenditures this much?Yes. The harsh 2008 Winter pushed MMWC's existing transmission and distribution system to the brink. The fact is, the next harsh winter could cause a severe water crisis for CCME. The need to upgrade the transmission line is urgent. The more quickly MMWC raises the revenues to perform the upgrade, the more quickly this project can be completed, and the more likely a crisis will be averted. Even after the new transmission line is put in, much more work will still need to be done on the distribution network. Furthermore, MMWC's user base has grown to a point that MMWC will have to, before too long, hire another employee. MMWC hopes to save money on its capital improvements by doing as much of the work as possible in house. But the demands that both existing maintenance and improvement projects will put on MMWC's employees time will likely require MMWC opening up a new position. A few years ago, MMWC estimated that it would cost about $4 million to replace its existing infrastructure. With an average $100K capital expenditures budget, it would take MMWC 40-50 years to completely replace that infrastructure, most of which is -- already -- over 30 years old. Also, a $90K-$100K capital expenditures budget is about equal to MMWC's average capital expenditures between 1991 and 1998, after adjusting for inflation. Such a budget would also put MMWC's overall capital expenditures, as a percentage of every dollar spent, at just over 25%, which is what Colorado Springs Utilities spends on capital improvements. MMWC's members can rest assured that MMWC will not waste any capital expenditure budget amounts on unnecessary improvements. To the extent that any budgeted funds are not spent on necessary and much-needed improvements in a given year, that amount will go to build up MMWC's capital reserves. Why is MMWC assessing its availability customers, and not just its user customers, for these improvements?MMWC's current infrastructure is barely adequate to meet the needs of its existing population. To meet the needs of future residents -- which will consist of people who currently own vacant lots or who will in the future buy vacant lots from MMWC's availability customers -- MMWC needs to expand the capacity of its transmission line. In short, MMWC's availability customers stand to benefit from these improvements as much as its current users. From 1981-2002, MMWC's user customers fees' were 3.2 times MMWC's availability customers' fees. Starting 2010, MMWC's $50/month user customers would pay 4.0 times the fees paid by MMWC's availability customers. To see a graph on the historical distribution of MMWC's costs between its availability and user customers, click here. See also the FAQ on this issue. Although some might consider $150/year to be a large availability fee, availability customers who ultimately build a house on their lot and tap into the system reap significant savings. Someone who owned a vacant CCME lot since 1974 -- 35 years ago -- and who paid for a connection in 2009 would have paid a total of ~$2,725 in combined availability and connection fees. This is considerably cheaper than the tap fees that most other Teller County water providers charge to new customers. If MMWC didn't charge availability fees, MMWC would have to charge new homeowners about $10,000 or so per tap to make up the lost revenues. How does MMWC's 2009 budget compare with MMWC's 2008 actual expenses?As shown in the two charts below, almost all of the 2009 budget increase over MMWC's 2008 actual expenses is allocated to maintenance and capital improvements:
Fig. 6: Pie Chart of MMWC's 2008 Expenditures
Fig. 7: Pie Chart of MMWC's 2009 Budget Incidentally, MMWC's 28% budgeted allocation toward capital expenses in 2009 is not only long overdue -- given the buildup of deferred maintenance in MMWC's system -- but also reasonable when compared to capital budgets of other utilities. For example, Colorado Springs Utility allocates 25% of its budget towards capital expenditures. How have MMWC's operating expenses changed over time?See the graph below:
Fig. 8: Bar Chart Breaking Down MMWC's Expenses, 1992-2008 To put it in a different perspective, the following graph illustrates MMWC's CPI-adjusted expenses on a per-user basis:
Fig. 9: Bar Chart Breaking Down MMWC's Expenses Per Tap, 1992-2008 Historically, how have MMWC's expenses been distributed between MMWC's availability and user customers?For most of its history, MMWC's user customers paid 3.2 times as much as its availability customers.
Fig. 10: Ratio Between User & Availability Fees, 1981-2008 With user fees at $50/month, and availability fees at $150, in 2010, that ratio will be $50 * 12 / $150 = 4:1. The graph below illustrates the % of MMWC's overall operating revenues contributed by MMWC's user and availability customers.
Fig. 11: Proportion of Operating Revenues Generated By User & Availability Fees, 1981-2008
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Copyright © 2009 MMWC Director Eric W.
Cernyar
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