Signed, Sealed & Delivered: How Colorado Springs Funded Its Landmark Southern Delivery System

The Southern Delivery System began operations in April 2016 and features 50 miles of predominantly 66-in. pipeline.

The Southern Delivery System began operations in April 2016 and features 50 miles of predominantly 66-in. pipeline.

By John Fredell & Bill Cherrier

Everybody likes saving money – especially on critical infrastructure projects paid for by the public.

The Southern Delivery System (SDS) — which began operation earlier this year — is the largest infrastructure project put into service at one time in the history of Colorado Springs Utilities (CSU), an integrated utility that supplies power and water to nearly a half a million people in Colorado’s second largest city. SDS Phase I brings water from the Pueblo Reservoir, some 50 miles south of Colorado Springs, northward through mostly 66-in. welded steel pipeline and via three raw-water pump stations to a water treatment plant and a finished water pump station. Today, SDS is capable of delivering up to 50 million gallons per day (MGD) to Colorado Springs and also serves three partner communities, Pueblo West, the City of Fountain and the Security Water District. SDS Phase II would be able to increase Colorado Springs’ capacity to 100 MGD or more.

As construction started in 2010, SDS Phase I was expected to cost as much as $985 million, of which $700 million to $800 million would be paid for through long-term debt. With principal and interest payments combined, SDS could have cost ratepayers $2.3 billion over 30 years. To support the project, Colorado Springs water rates could have more than doubled over a decade.

But through well-timed water rate increases, project cost reductions through value engineering and cost management techniques, and historically low interest rates, CSU was able to borrow less money, and borrow at a far lower cost than anticipated. The final construction tab for SDS came in at $825 million. Of that, $352 million was cash funded and the remaining $473 million was funded with debt. Total interest on the debt is estimated at $618 million over 30 years or more, bringing the total for construction cost and 30-year interest expense to $1.4 billion — far less than projected — which enabled CSU to cut the projected water rate increases for customers by more than half.

Educating Stakeholders, Performing Analyses

rate-increase-chartCSU began educating the public, city council and regulators about the need for SDS and its cost long before dirt was turned.

SDS underwent nearly 10 years of public discussion, environmental impact studies and permitting, during which time CSU conducted more than 300 presentations to city councils, business groups and civic groups; conducted many news media briefings; and published numerous layperson-friendly position papers. As a result, when SDS received its Record of Decision from the Bureau of Reclamation in early 2009, providing the green light for construction, city council, the public and the media understood why the project was needed, how it would be built and the projected cost.

In those early years, CSU also planned how to pay for the project, including estimating costs and modeling the impact of water rate increases. At the outset, CSU anticipated increasing water rates 121 percent over nine years. Although CSU customers had not experienced such rate increases in recent memory, the resulting water rates still fell easily within independent affordability guidelines. In fact, the SDS Environment Impact Statement (EIS) set a more stringent standard — 2 percent of median household income — than the EPA’s own affordability index of 2.5 percent of median household income. And once the median household income in El Paso County increase is factored in ($56,800 in 2009 to an estimated $78,900 in 2019) water bills would remain below 1.25 percent of median household income.

Carefully Timed Rate Increases

In June of 2009, CSU sought approval for the project and its funding strategy. In a presentation to Colorado Springs City Council, the utility laid out the plan: SDS would cost $880 million in 2009 dollars (escalated to $985 million in construction-year spending). Multiple construction schedules were reviewed, with the associated rate increases for each construction timeframe. SDS technically could have been built on shorter timeframes, which would have required steeper rate increases. The council selected a construction schedule that would take six years, with the largest cash outlays in the second half of construction. According to the project’s six-year budget, construction spending would climb from $30 million in 2011 each year to a peak of $170 million in 2014, and then fall to $50 million in 2016 when SDS would go into service.

The goal was to cash fund the project as much as possible, to minimize long-term borrowing costs. Therefore, CSU sought to increase customer water rates at the beginning of the project, in advance of the need for the money.

This schedule served two purposes. One, it allowed CSU to build funding in time to support heavy construction. Two, it demonstrated the public’s confidence in the project, which would prove invaluable when selling the project in the municipal bond market.

Specifically, CSU sought approval to raise water rates 12 percent a year for seven consecutive years, followed by two 4 percent increases, for a projected cumulative increase of 121 percent. Additionally, it sought pre-approval for the first two years of rate increases. Knowing that the public can lose its appetite to pay for projects, CSU sought approval for the funding plan simultaneously with approval for the project itself. One could not happen without the other.

In another strategic move, CSU also planned to reduce its capital spending budget by 30 percent to 40 percent a year starting in 2010, deferring repairs on other parts of the system, for the entirety of the project.  As for the remainder of the money, the AA-bond-rated utility was projected to sell $700 million to $800 million in 40-year municipal bonds at interest rates between 5 percent and 6 percent.

On July 19, 2009, Colorado Springs City Council voted to approve the project.

$160 Million Saved in Construction Costs

With the project approved, CSU realized it needed a delivery approach that would stand up to a tight schedule, stakeholder scrutiny and ongoing budget pressure. In 2010, the utility selected MWH Global to provide the project comprehensive co-program management support.

The SDS program team knew that approved rate increases represented the maximum amount ratepayers would be willing to pay, and that any opportunity to bring in the project under budget would be viewed positively by ratepayers. Therefore, the team continued and ramped up the use of value engineering — a systematic, organized approach to obtaining value for every dollar spent — which had started very early in the project.

To manage construction, the team divided the pipelines and facilities into at least 20 separate work packages and set high expectations and stringent budget requirements for each work package. Design engineers were assigned a ‘design-to’ monetary value, wherein designs have to meet specific performance criteria at a price 10 percent to 20 percent lower than conceptual design estimates. Value engineering ideas were then evaluated and documented at 30 percent, 60 percent and 90 percent of design.

Through a variety of approaches, the combined SDS-MWH program team achieved significant cost savings. For example, the water treatment plant was value engineered and redesigned from top to bottom. There were four non-negotiable items: The plant had to produce the same water quality and capacity (50 million gallons per day) as originally planned, and safety and quality were paramount. Much of the value engineering simply focused on prioritizing needs while eliminating wants. The plant’s future operators were involved every step of the way, producing important efficiencies. For example, all treatment processes were placed under one roof so that staff would not have to brave unsafe winter conditions walking among multiple buildings as in the original design. The consolidation reduced the facility’s footprint and eliminated four miles of piping.

In the end, value engineering resulted in best quality and $65 million in savings.

Techniques that produced savings on the 50-mile pipeline included welding from inside the pipe after the trench was backfilled ($2 million) and tunneling under a waterway, highway and railroad line for $10 million. An estimated $10 million was saved through carefully siting the raw water pump stations so as to eliminate the need to build new electric substations. Design modifications and strategic procurements saved another $20.5 million on the pump stations themselves.

All told, these measures and others — including aggressively competing procurements among well-qualified contractors —reduced the project’s cost by $160 million without sacrificing safety or quality.  Some of these savings were not realized until the later stages of the project, however, the rigorous management of SDS showed both city council and ratings agencies that CSU had the project under control.

Historically Low Interest Rates

Showing that SDS was well-managed, under budget and securely funded allowed bond rating agencies to maintain their confidence in CSU. The CSU program management team frequently and transparently communicated with bond rating agencies, explaining the program management approach and the city council’s commitment to funding the project. The initial two years of early funding demonstrated that commitment. As a result, CSU maintained its AA rating, which was essential for CSU to take advantage of historically low interest rates.

The Great Recession of 2008 had caused a “flight to quality” from equities to government-backed issuances. Interest rates plummeted on treasury and municipal bonds, and utilities with strong credit ratings were able to take advantage of this opportunity. Although CSU had originally forecast interest rates of between 5 and 6 percent, the utility’s AA rating allowed it to issue bonds at between 3 percent 4 percent from 2010 through 2012 and reduce the term to 30 years. In the end, long-term borrowing was cut nearly in half. And, because it store-housed cash to prepare for construction, CSU needed to borrow less than planned. From 2010 through 2012, CSU issued $440 million in Utility System Refunding Revenue Bonds and Build America bonds.

Rate Increase Chart

Raw water arrives at the Edward W. Bailey treatment plant, the most technologically-advanced water treatment plant in CSU’s system. It utilizes ozone, biological filtration and disinfection to treat drinking water.

The 2012 Request

CSU returned to the Colorado Springs City Council in 2012 with an unusual request: to ask for less money than before. According to new projections, after the two annual 12 percent increases CSU would need just two more years of 10 percent rate increases, during 2013 and 2014, for a cumulative 52 percent rate hike, to finance SDS. By borrowing far less than originally planned, and at far lower interest rates, SDS cost ratepayers 35 percent less than originally planned.

Customers judge an organization by its performance, and SDS finished strong. The project started operation in April 2016, just as the organization planned. The project demonstrated to the financial community and the citizen owners that Colorado Springs Utilities had the financial and project management skill to plan, finance and build one of the largest water infrastructure projects in the western United States during this century.

john-fredell John Fredell has served as the program director for the Southern Delivery System (SDS) since September 2007. In that role, Fredell is responsible for planning, permitting and construction of the SDS, a major water delivery system that will bring water from the Arkansas River to Colorado Springs and its project partners. Fredell has been with Colorado Springs Utilities since 1993, and has been closely involved with development of the Southern Delivery System since 2002. Prior to his selection as SDS Program Director, he held other legal positions with Colorado Springs Utilities, most recently Deputy City Attorney-Utilities. In that role, he served on the Chief Executive Officer’s leadership team.

bill-cherrierBill Cherrier is the chief financial officer of Colorado Springs Utilities. He has more than 30 years of experience in the utility industry, notably as manager of finance and development at Alliant Energy Generation in Cedar Rapids, Iowa, and now as chief planning and finance officer at Colorado Spring Utilities (CSU) in Colorado Springs, Colo. While at CSU, Cherrier has led financing of $2.5 billion in tax exempt debt, corporate bonds and equity financing. He has provided leadership on matters related to strategic planning; financing activities including debt issuance; financial risk management; budgeting and financial planning; credit rating agency relationships; and administering procurement policies and processes.

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