Water Utility Valuation

Confidential Client, 
California

Water Utility Valuation

Service Type: 
Project Highlights: 
  • Prepared valuation estimate based on three main approaches:
  1. The “Asset Valuation” approach.
  2. The “Income Valuation” approach.
  3. The “Comparable Sales” or “Market” approach.
  • Developed inventory, conducted visual condition assessment, and estimated replacement costs and timing for all assets.
  • Analyzed six years of income statements and modeled the average earnings under three separate discount rates.
  • Researched comparable sales within the past twenty years, both within and outside of California. Accessed state archives for relevant transactions not accessible in the state’s digitized records.
  • Modeled the effect of the purchase on the existing rate payers, using a range of purchase prices and financial assumptions.
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As part of its inquiry into feasibility of acquisition of a neighboring utility, a confidential client engaged Carollo’s BSG to conduct an independent valuation of the neighboring facility’s assets. The Scope of Services consisted of tasks necessary to develop a preliminary range of values for possible acquisition. Carollo conducted this effort utilizing the three valuation approaches generally accepted by the water utility industry and recommended by the American Water Works Association (AWWA):

  1. The “Asset Valuation” approach.
  2. The “Income Valuation” approach.
  3. The “Comparable Sales” or “Market” approach.

In addition, upon request of the client, Carollo performed a fourth valuation analysis, the “Rate Base” approach. While this methodology is not widely used for water utility valuation, it nevertheless provided an additional data point for consideration.

For the Asset Valuation approach, Carollo developed an asset inventory and conducted a visual condition assessment of all of the neighboring utilities well sites, treatment facilities, and pump stations. Installation dates, current condition, and industry standard service lives were used to estimate the remaining life of each asset. Costs estimates were developed for all of the assets, representing in-kind replacement in today’s dollars.

For the Income Valuation approach, Carollo estimated the value of the potential cash flows in the form of pre-tax earnings of the physical assets of the system, rather than the costs of construction or of replacing the system. Carollo relied on six years of financial statements provided within the annual reports made  to the California Public Utilities Commission (CPUC), the body that regulates investor owned utilities. In addition, Carollo later obtained updated audited financial information for the six years, which was incorporated into the analysis.

For the Comparable Sales approach, Carollo estimated the value of the system based upon a comparative assessment of arm’s length, local system purchases—results of willing sellers and willing buyers completing transactions. Carollo conducted research of the CPUC, both through digital records and paper archives, as well as neighboring states.

For the Rate Base approach, Carollo calculated an estimate of the system’s value using the original cost of the utility, less accumulated depreciation and other reserves, less contributions in aid of construction (CIAC), less advances for construction, plus a working capital allowance.

Finally, a rate impact analysis of purchasing the water utility was performed to determine the maximum potential impact to each rate paying customer. The valuation estimates by the four methods and the rate impact analysis were presented to the client. These were used as a basis for the client’s initial offer and continued negotiations.