Would you be ready if your largest water customer left your city tomorrow? Here are four strategies for a challenging scenario.
Large industrial companies can be some of a water utility’s best customers. They use a lot of water, and they pay for it. They offer a high sales revenue per customer, and billing is usually simple.
They also help to offset seasonal imbalances in water demand created by other customers. A large industrial customer still needs water during winter, while residential users reduce their consumption — lawns aren’t watered, vehicles aren’t washed and swimming pools don’t need to be filled.
But, what happens if a large industrial customer moves away? It can have a great effect on your city and its finances. The biggest concern is often sudden loss of revenue that affects other utility customers.
Let’s take a look at some strategies you can apply, with examples, that provide solutions if or when a large industrial company no longer needs to purchase water from your city’s utility.
One of the first steps is to find ways to increase revenue by adjusting water rates and reduce expenses through operational changes.
In one instance, a large paper mill, using 1 billion gallons of water each year, closed their facility. The utility lost a customer that accounted for 94 percent of revenue and 99 percent of sales. After the mill closed, water usage went down drastically — to only 3 million gallons per year.
To offset the loss of this revenue, the water utility immediately applied for a rate adjustment from the state’s utility regulatory agency. After the rate case was completed, the utility was able to increase residential customer sales by 20 percent.
The water utility also made significant operational changes, including reducing staffing and taking a water tower out of service to reduce additional annual operating expenses.
Another step is to lower annual payments by restructuring your debt.
When a large foundry, accounting for 27 percent of total water use, was set to leave one town, the town looked for ways to compensate for the large reduction in water utility revenue. The town determined that without a substantial water rate increase, the water utility would not make its required revenue bond debt coverage per its bond covenant.
The utility worked with its financial consultant to refinance outstanding revenue bonds, thereby lowering annual bond payments to a reasonable rate for their new circumstances. The utility also increased water rates by 25 percent to maintain required bond debt coverage.
If you can, reduce interest payments by prepaying loans and make good use of a termination payment from the company leaving. When a large food processing company was set to move out of one community, the city had to find ways to recover $500,000 in annual utility revenue.
To offset this loss, the city received permission from the state to prepay part of its Clean Water Fund loan. Generally, you can’t prepay Clean Water Fund and Safe Drinking Water Fund revolving loans unless there is an extraordinary circumstance. However, in this case, loss of the utility’s largest customer qualified as an extraordinary circumstance.
The city was also able to refinance a portion of its utility revenue bonds with funds from a negotiated termination payment from the food company.
Prevention is the best solution. If possible, partner with the private sector before anything happens to make sure their exit doesn’t create a burden.
When one town learned they needed a new water treatment plant to remove radium from their well water, they partnered with a local cheese factory to help pay for it.
Since a local cheese factory accounted for 90 percent of the utility’s annual water sales, the company agreed to make quarterly payments to fund part of the loan necessary to pay for the improvement
The town and cheese factory recognized they needed each other and made a deal. They came to an agreement that even if the company ever decided to suspend its purchases of the town’s water, the company would continue to make regular payments on the loan until it was paid off. This agreement is an excellent example of a successful public-private partnership. Should the company leave, the town won’t have to scramble for a solution.
If or when a large utility customer leaves, you’ll see dramatic effects on your city’s bottom line. But if you’re prepared, and consider what those effects might be before such a thing happens, you’ll find there are many ways to get back on track.
Steve Peterson overseas SEH's water and wastewater practices in Wisconsin, Indiana and Michigan and is dedicated to helping utilities navigate challenges. Contact Steve