EXECUTIVE DIRECTOR'S REPORT TO H2GO CUSTOMERS
Your H2GO Executive Director and staff is ever mindful to closely appraise in-house operating expenses with an awareness to monitor outside influences that affect customer water rates. For example, H2GO buys finished water from Brunswick County Public Utilities (BrunsCo PU) who in turn buys raw water, drawn from the Cape Fear River, from the Lower Cape Fear Water & Sewer Authority (LCFW&SA). For some time, there has been a growing realization that these wholesale water providers will need to undertake large-scale infrastructure improvements to meet the growing water demands of our region. Their proposed multi-million dollar projects could significantly increase the cost of water to H2GO, ultimately raising the rates and charges to you for water service. With these realizations in mind, the H2GO Board of Commissioners sought to investigate alternative water supplies, including the possible construction and operation of our own reverse osmosis water treatment facility - thereby eliminating our dependence upon wholesale water providers, their wholesale water fees, and their surface water supplies from the Cape Fear River. This “Executive Director's Report to H2GO Customers” was prepared to provide an overview of the measured approach taken by H2GO to investigate alternative water supplies; the steps and actions pursued by the Board and staff; the scientific reports and field data analyzed for “Go or No-Go” decisions along the way. The purpose of these efforts is to find the best solutions for the lowest possible customer rates as we continue to plan for tomorrow’s water needs – Today.
Phase 1 – Water Supply Feasibility Study
July 2011 – H2GO commissioned a Water Supply Feasibility Study to evaluate alternative water supplies to meet future needs based on anticipated future service areas and customer growth over a 20-year planning period. This study evaluated the feasibility of 1) obtaining surface water (Cape Fear River) supplies from the LCFW&SA with a new surface water treatment plant; 2) the feasibility of developing groundwater supplies for treatment in a new reverse osmosis (RO) treatment plant; and 3) comparing those cost estimates to continued purchase of finished water from BrunsCo PU. As part of the alternative water supply evaluations, Groundwater Management Associates (GMA) performed a Hydrogeologic Framework Study and Preliminary Wellfield Evaluation to target aquifers for future exploration that have potential to provide sustainable and treatable brackish groundwater supplies for an RO water treatment plant.
The Water Supply Feasibility Study, completed in March 2012, determined that no additional supply allocations from LCFW&SA were available to pursue surface water supplies and treatment; that sustainable and treatable groundwater supplies from the Lower Peedee and the Black Creek aquifers underlie the H2GO service area; and that preliminary cost comparisons indicate brackish groundwater supplies with RO water treatment are favorable over continued purchase of wholesale water from BrunsCo PU. Go or No-Go Analysis: Given the findings of the Water Supply Feasibility Study, the H2GO Board of Commissioners determined that; a) further evaluations and understanding of reverse osmosis as a potential treatment alternative were needed; b) a financial feasibility study would be required to evaluate the economic feasibility of building a new RO water treatment plant versus continuing to purchase finished water from BrunsCo PU; c) further evaluation and understanding of planned capital improvement costs by BrunsCo PU and LCFW&SA (wholesale finished water and wholesale raw water providers) were needed, and; d) potential groundwater supplies in the Lower Peedee and Black Creek aquifers warranted further exploration via test wells to quantify the characteristics of these source aquifers.
Phase 2 – Evaluate Existing NC RO Plants
April 2012 thru August 2013 – North Carolina has twelve (12) existing municipal RO water plants and a few other RO plants in various stages of planning, design, and/or construction. Each RO water plant has a unique treatment train based on supply water characteristics. H2GO evaluated each RO plant, comparing treatment capacities; water source and supply characteristics; pre-treatment and post-treatment operations; permeate recovery rates; concentrate characteristics and outfall locations; operation and maintenance costs; and facility location in relationship to their community. The H2GO Board, Leland Town Council, Belville Commissioners and staff toured RO water plants in NC and discussed with their administrators and plant operators the advantages of RO water treatment. Go or No-Go Analysis: The existing North Carolina RO water plants were found to be benign facilities, many located in the heart of the residential and business centers of the communities. Facilities and operations are simplistic; no disruptive activities or environmental impacts; and the RO water plants are viewed as community assets.
Phase 3 – Financial Feasibility Analysis
March, 2013 thru August, 2013 – Based on the Water Supply Feasibility Study, H2GO commissioned Raftelis Financial Consultants to prepare a Feasibility Analysis to evaluate the economic feasibility of building a new RO water treatment plant versus continuing to purchase wholesale water from BrunsCo PU. The analysis focused on three primary measures: 1) differences in projected annual costs and expected impacts on rates and customers; 2) Net Present Value (NPV) of total costs over a 20-year planning period; and 3) reserves generated from targeted debt coverage. Go or No-Go Analysis: The Financial Feasibility Analysis clearly indicated the option to build a new RO water treatment plant is better than continuing to purchase wholesale water from BrunsCo PU. Raftelis’ findings indicated that building an RO plant would result in lower long-term cumulative customer water rate increases; a better Net Present Value; and larger cumulative reserves.
Phase 4 – Monitor Wholesaler Costs
2012 thru 2013 - The LCFW&SA (this region’s raw water supplier) commissioned a Regional System Needs Analysis in 2011. Based on the demand forecast, peak demand was projected to exceed peak raw water capacity in 2013-2014. As a temporary stop-gap measure the Authority installed a set of booster pumps to extend the anticipated capacity deficit - now projected to be year 2020. The construction costs for their new 14 mile, 60” raw water transmission line, a booster pump station, and a 20 million gallon raw water storage tank were estimated to be over $64 million. As a result, raw water wholesale rates were projected to increase nearly 135%.
BrunsCo PU Capital Improvement Plans (CIP’s) developed in 2011 and 2012 indicated they would spend nearly $48 million for their treatment plant capacity upgrades and water transmission lines for the primary purpose of transferring more than 18 million gallons per day of treated water from the Cape Fear River basin to the Lumber River basin to serve their growing customer base in southwest Brunswick County. BrunsCo PU also indicated they were evaluating wholesale rates moving from the Producers Price Index (PPI) to a cost-based rate methodology. This would in effect provide BrunsCo PU the opportunity to build into their wholesale rates their increased debt service costs; their increasing raw water costs; and their increasing operations & maintenance (O&M) costs. Existing wholesale water contracts, however, push that rate methodology to 2020. The implementation timeline for BrunsCo PU’s capital improvements is largely based on the availability of additional raw water supplies from LCFW&SA, and the expiration or renegotiation of existing wholesale water contracts. Go or No-Go Analysis: LCFW&SA and BrunsCo PU are planning for future water needs. And, while those planned improvements provide little benefit to our service area, we (you) will pay for these wholesaler improvements through increasing wholesale water rates. Over the past 15 years, H2GO has paid more than $17 million to BrunsCo PU for wholesale water. H2GO will pay nearly $1.8 million for wholesale water in 2016. And, based on historical growth and wholesale rate trending, it is projected that H2GO will pay to BrunsCo PU more than $80 million over the next 20 years for the purchase of wholesale water.
It should be noted that since the 2012 LCFW&SA Needs Analysis, the estimated cost for their new 14 mile, 60” raw water transmission line increased by $5 million between 2013 and 2015. The LCFW&SA 2015 capital cost increases were not included in H2GO’s 2013 Financial Feasibility Analysis. It should also be noted that BrunsCo PU developed an environmental assessment in 2013 that detailed $90 million in upgrades to their water treatment plant and transmission lines. Likewise, the BrunsCo PU capital cost increases from $48 million to $90 million were not included in H2GO’s 2013 Financial Feasibility Analysis.
Phase 5 – Groundwater Test Wells
May, 2012 thru June, 2013 – Under GMA’s guidance, H2GO installed 4 test wells - two wells at our elevated water tank site, and two wells on Trade Street. These locations were selected to provide a hydrogeologic cross section from southeast to northwest through H2GO’s service area. At each test well site, one 4” well was installed 400’ deep into the Lower Peedee aquifer and one 4” well was installed 600’ deep into the Black Creek aquifer. Pump tests were performed and water samples were analyzed from each well at each site. Go or No-Go Analysis: Water quality characteristics and well production rates tested better than anticipated. This test well data would indicate that fewer well sites and less raw water transmission lines would be required for the project, that RO post-treatment processes could be significantly reduced or eliminated, that permeate recovery rates could increase (improved efficiencies), and that RO plant operational costs could be reduced.
Phase 6 – CORMIX Study
October 2013 thru February 2014 - Brackish concentrate, or reject water from RO plant operations are proposed to be discharged to the Brunswick River. CORMIX is an expert rule-based system for the analysis, prediction, and design of discharges into water bodies, i.e.., the Brunswick River. Based on the receiving stream characteristics obtained from field investigations, and concentrate water chemistry, CORMIX predicts mixing and plume characteristics from the proposed outfall. Go or No-Go Analysis: The RO system concentrate water has an expected salinity approximately equal to seawater and is the water to be permitted and discharged to the Brunswick River. Concentrate water characteristics will be reduced to ambient background conditions of the Brunswick River within a 10 meter mixing zone downstream of the submerged outfall, well within applicable State regulations.
Phase 7 – Environmental Assessment
October 2013 thru July 2015 – Based on the North Carolina State Environmental Policy Act (SEPA), a comprehensive Environmental Assessment (EA) for the proposed RO project was developed. Go or No-Go Analysis: The findings from the EA determined there will be no significant environmental impacts from the proposed RO project.
Phase 8 – Phase 4 Revisited – Monitor Wholesaler Costs
October 2014 - LCFW&SA suspended all cost considerations associated with the proposed 60” raw water transmission main. BrunsCo PU announced it would prefer to delay the raw water transmission line project until 2020-2022, if not later. Go or No-Go Analysis: Given the uncertainty of future raw water supplies from LCFW&SA, and BrunsCo’s uncertain timing to meet H2GO’s future water demands, this is not a prudent planning approach or a tangible feasible solution to the rapidly increasing water demands in the H2GO service area.
Phase 9 – Production Wells
June 2015 thru October 2015 – Two (2) production wells were recently installed at the proposed RO plant site: one 12” well was installed 400’ deep into the Lower Peedee aquifer and one 12” well was installed 600’ deep into the Black Creek aquifer. Pump testing performed to-date indicates better performance rates than from the test wells and preliminary sampling indicates better water quality than from the test wells. Go or No-Go Analysis: The production rates and water quality from these two full production wells confirm that significant project cost reductions will be realized from fewer well sites, less raw water transmission lines, reduced post-treatment processes, improved permeate recovery rates, and reduced operational expenses. It should be noted that these estimated project cost savings (estimated financed project reduced from nearly $40M to less than $30M) were not included in H2GO’s 2013 Financial Feasibility Analysis.
Phase 10 – RO Pilot Plant Testing
October 2015 thru January 2016 - RO pilot plant testing was conducted for 90 days. The pilot plant testing indicates the raw water feed is of high quality; permeate quality will meet all drinking water standards; RO concentrate will have a salinity similar to seawater; concentrate discharge will not be toxic or detrimental to the Brunswick River. Go or No-Go Analysis: The results indicate that reverse osmosis treatment of the brackish groundwater supplies is feasible and can produce a high quality water suitable for H2GO customers.
Phase 11 – Preliminary Engineering Report (PER)
June 2016 – The Wooten Company finalized the PER detailing existing water supplies, future conditions, project alternatives, recommended plan, and plan implementation. Go or No-Go Analysis: The recommended alternative includes deep aquifer groundwater supplies, a reverse osmosis water treatment plant, and discharge of RO concentrate water to the Brunswick River.
Phase 12 – Financial Analysis Update
June 2016 – Raftelis Financial Consultants prepared an updated Economic Feasibility Study for the proposed Reverse Osmosis Water Treatment Plant based on probably construction costs, detailed O&M costs, water to be produced, escalation factors, growth assumptions, and future capital improvements. Go or No-Go Analysis: The study results indicate that the net present value and the average unit cost are more favorable to build the RO plant; building the RO plant results in higher cumulative cash surpluses; and current water rates will not be increased. These results are shown to be more favorable to build the RO water treatment plant than the 2013 financial analysis.
Phase 13 – NPDES Permitting
April 2016 thru May 2017 – The application for the NPDES permit was submitted to NCDEQ in April 2015 and included a dilution study, an Engineering Alternative Analysis (EAA), and sampling results from a RO pilot study using groundwater from wells which will be the source water for the proposed RO water treatment plant. A public hearing was held in January 2016 to allow the public to comment on the draft NPDES wastewater permit written for the proposed discharge. Go or No-Go Analysis: Based on the review of public record, written and oral comments, NC General Statues and Administrative Code, and recommendations of DWR staff, the final NPDES permit was issued to H2GO on May 8, 2017.
Phase 14 – Engineering Design & Construction Bidding
July 2015 thru June 2016 – H2GO contracted The Wooten Company to prepare detailed bidding/construction plans and specifications for all phases of the water supply and RO water treatment plant project. Contract 1, Production Wells, has been bid and awarded. The production wells are currently under construction at 4 additional well sites. The RO equipment procurement has been bid and awarded and the fabrication of that equipment is underway with delivery of the equipment anticipated in February 2018. The remaining contracts for raw and finished water lines, concentrate line and river diffusers, and RO water treatment plant are out for public bid with a bid date of June 15, 2017. We anticipate award of contracts and notices to proceed for these remaining project phases in August 2017.
Phase 15 – Bond Counsel Oversight
January 2017 – H2GO engaged the firm of Williams Mullen to serve as bond counsel and special tax counsel in connection with the issuance of revenue bonds to finance up to $25.25M of the overall $34M project.
Phase 16 – Financial Advisor Oversight
February 2017 – H2GO engaged Davenport & Company to provide all transaction related services necessary to effect the project financing, and to assist in preparing necessary documentation for LGC funding approvals. With Davenport’s assistance, H2GO has received an acceptable funding proposal from First Bank to finance the balance of the project at 2.99% over a 20-year term.
Phase 17 – Phase 4 Revisited – Monitor Wholesaler Costs
March 2017 - A major (LCFW&SA) raw water transmission line failure in October 2016 resulted in nearly 2 months of severe water restrictions and a State of Emergency in Brunswick County. Following the event, LCFW&SA and BrunsCo PU and Cape Fear Public Utility Authority (CFPUA) made the decision to resurrect the planning and design of the new 60” raw water transmission line. To-date, the participating parties and allocated project costs have yet to be determined. Construction may begin in FY2020. BrunsCo PU will need to upgrade their water treatment plant capacity and to-date there is no definitive timeline for that construction. The most recent communication with BrunsCo staff indicates the County Commissioners have no plans to move away from the PPI as the wholesale rate setting method.
Phase 18 – Evaluation of Forecast Statement
May 2017 – Raftelis Financial Consultants evaluated forecast statements of revenues, expenses, debt service and debt service coverage for fiscal years FY2017 thru FY2022. The forecast statement evaluation confirms that the forecast and underlying assumptions demonstrate H2GO is self-sufficient, and is expected to generate adequate revenues to meet and exceed all coverage requirements.
Phase 19 – Local Government Commission (LGC) Approval
June 2017 thru July 2017 – An application for approval of revenue bonds was submitted to the LGC on June 9, 2017 with supplemental information to be provided following receipt of additional construction bids. Consideration of the revenue bond approval is anticipated for August 1, 2017.
Phase 20 –Construction of the wells and fabrication of the RO equipment is underway. The remaining construction contracts will begin in August 2017 with project completion by 2019. Phase 21 – Start-up operations beginning 2019
Each phase, and each decision to proceed to the next step in this process, has been based on sound engineering, scientific, and financial analyses. Along the way, it has become increasingly apparent that rising wholesale rates will have a significantly greater impact on H2GO customer rates than if we move to invest those would-be wholesale water payments into an RO water treatment plant. Favorable studies, reports, field data, and reduced estimates for the RO project have shown the RO treatment alternative to be the most compelling option to insure a resilient, sustainable water supply at the lowest possible rates for the long-term benefit of our customers. If you have any questions or concerns about the work we are doing, please contact us or attend any of our Board meetings.
Your H2GO, working for you.