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29 - Waste Water Treatment Plant Project Status UpdateILI TO: Mayor, Mayor Pro Tem & City Council FROM: Grayson Path, City Manager Rob Vine, Assistant City Manager Doug Harris, Utilities Director SUBJECT: Waste Water Treatment Plant Project — Status Update DATE: July 25, 2022 BACKGROUND: On April 11, 2022, the City Council heard a status update and presentation on the Waste Water Treatment Plant (WWTP) Project. At that time, the plans had reached 90% completion. We have since then reached 100% design, TCEQ has approved our design, and we have issued a request for bids. This was a two-step process designed to narrow our list to qualified contractors, then accept bids from this shortlist of qualified contractors. Those bids are due at the end of August 2022. We have authorized an extension by request of some of the contractors which we believe will work in our favor of seeking better bids. In addition, we held a mandatory pre-bid meeting for contractors on Tuesday, July 12th at the WWTP. The meeting went very well. On Monday, June 20, 2022, several City Staff met with representatives from Garver Engineering, SAMCO Capital Financial Advisors, and McCall, Parkhurst & Horton Legal Counsel in Frisco, TX to discuss the status of the WWTP Project, specifically the economics at this time. As you are all aware, our nation has seen rampant price increases and material shortages this past year. Our project is expected to be impacted by this as well. STATUS OF ISSUE: When we started this project two years ago, we were estimating a total project cost of $60-$70 million. Because of arbitrage issues with the IRS, and to help ease our rate increases for the residents, we took out a $45 million bond as a "phase I" to get us started. To support this, we worked with our financial advisor and rate consultant to craft a strategic approach for rate increases using a stair step method to allow residents to acclimate to increases. The key is balancing our ability to "cash flow" which is our ability to raise enough revenue each year to meet the debt payments when they come due. This is a true balancing act because we need money to fund the project, but the bond requires repayment of debt to the lenders which cannot be pushed off too far, all the while we want to ease in to rate increases for our residents. As I said, a plan was crafted and the City Council implemented it. With this, we incorporated rate increases to then allow us to take out the "phase II" of bonding when the time came, which was the balance of the estimated $60-$70 million project. That would be scheduled to occur in 2024 or 2025. As of today, I am told that our rate program has been very successful, fully capable to meet the growing needs of debt payment for our initial bond and foreseen to meet the needs of the second bond that was planned to come, all under the original cost estimates. Now, two years later, under the 2022 economy and price hikes we are seeing, our project has grown to an estimated $80-$90 million. Our staff and Garver Engineering have worked extremely hard to eliminate any excess and provide as lean a project as possible. However, there is only so much you can cut before you functionally eliminate the project completely. I must also stress, "phase I" is incomplete without "phase II". Remember, we only divided this project up in to two phases because of arbitrage issues and a goal of easing residents in to rate increases over a period of years given debt payment can only be delayed so long. It could become easy to incorrectly think that "phase I" will give us a product that will suffice. When asked point blank, our staff and Garver have stressed that "phase I" will not suffice. What we have done is taken the full project, pulled out elements that can hold out long enough to allow us to build "phase I" elements. But once "phase I" is complete, the remaining aged elements scheduled for "phase II" must start. Basically, "phase II" elements can hang in there longer than "phase I" elements. Garver Engineering has estimated that, under today's pricing in the market, we are in need of an additional estimated $7 million to complete those elements designed in "phase P. The price for "phase II" has also gone up, making up the balance of the now estimated $80-$90 million total price tag. Important — the request for bids we have issued will tell us the true amount needed for "phase I", so I am still hopeful that having a slate of qualified and competitive contractors as well as Garver Engineering examining and verifying their bid pricing, will bring about some better pricing than expected. However, we should expect a need to issue a second bond to support "phase I", this year. That unfortunately will require us to amend our rate increase plan. I still fully plan to stair step our increases over time, but the rise of the steps will have to get a little steeper. We are trying to avoid turning this in to a cliff climb though, so we will work hard to balance this out. In a year or two, we will need to begin preparations for a "phase II" bond. Instead of this being $15-$20 million as we originally planned, it is now estimated to be closer to $35-$40 million. Again, bids will decide and if we continue to have a slate of good and qualified competition, we will get the best price we possibly could get. This is not the type of news I like to give you, but as City Manager, it is my job to give you the news as I know it. I know that rate increases are painful, but we must stay the course to complete this critical project. BUDGET: Please see the "Status of Issue" section above. OPTIONS: 1. This agenda item is information only and is meant to prepare you for what we expect to be higher than planned bids with a possible need to seek an additional bond for phase I, thus additional rate increases to support this bond. RECOMMENDATION: 1. This agenda item is information only and is meant to prepare you for what we expect to be higher than planned bids with a possible need to seek an additional bond for phase I, thus additional rate increases to support this bond.