CAPITAL EXPENDITURE REQUEST

Transcription

1 Department 2016 CAP EX Seed Cleaning Plant Planning & Development Budget 2016 Description CAPITAL EXPENDITURE REQUEST Type of Request Equipment 2016 Budget PROGRAM: Seed Cleaning Plant Amount ITEM REQUESTED 2016 Construction cost as per business plan $ 4,250, EQUIPMENT ADDITION REQUIREMENTS Budget Total Initials $ 4,250, Dept Manager Director Finance J:\2016 DATA\FINANCE\BUDGET\Capital Expenditure requests\2016 CAP EX Seed Cleaning Plant

2 Nampa Seed Cleaning Plant Capital and Operating Projections Prepared by: Mathieu Bergeron Northern Sunrise County Prepared for: Seed Cleaning Plant Table of Contents 1. Executive Summary page 2 2. Seed Cleaning Plant Operations page 2 3. Financial Situation page 3 4. Renovations vs. New Construction page 4 5. Request from NSC for a New Plant page 5 6. Options Moving Forward page 6 7. Conclusion page 7 8. Appendices page 7

3 1 Executive Summary 1.1 Business Plan Objective At the direction of Council, NSC administration has engaged the Nampa Co-operative Seed Processors Ltd. (NCSP) to develop a business plan to reflect the current state of the association, its assets and liabilities, opportunities and challenges moving forward. The end result of the plan is to provide the NCSP and NSC Council options for: 1. Capital Planning & Investments 2. Land Purchasing & Transfers 3. Operations 1.2 Business Planning Process The business plan will be developed in cooperation with the NCSP and will serve a living document throughout the planning and construction of the project. The plan will integrate feedback from the NCSP, NSC Council and NSC Administration, not discounting each stakeholder s objectives and mandates. In 2014, Frontline Industrial Solutions Ltd. was retained to provide technical expertise into the conceptualizing and design of a new seed cleaning plant. A final plan was presented to Council on October 13, Construction estimates are reflected in this document. 2 Seed Cleaning Plant Operations 2.1 Board of Directors The NCSP Board of Directors is made up of a Chair, Vice-Chair and four (4) members at large, all members of the COOP. A County designate also holds a director position on the board. 2.2 Membership 2.3 Staff The NCSP consists of 345 members, approximately 100 of which are active. At the member s request, a farmer can sell its membership at the age of 70 or once the farmer sells all of its land. The membership is predominantly from Northern Sunrise County, with the addition of members South to Jean Cote and North to Weberville. Staffing for the NCSP consists of one full time staff member for the general operations and maintenance of the plant and an additional.25 position for admin and extra help during the busy season. Note: Seed cleaning plant operations are a specialized trade and a succession planning exercise should be undertaken as part of the expansion plan. Resources exist through the provincial association of seed cleaning plants. 2

4 2.4 Competition The NCSP s primary competitors are the seed cleaning plants in Falher and Grimshaw. Both plants are limited in their capacity and both have the potential of losing participating members to newer plants recently constructed in High Prairie and Fairview. The likelihood of these plants being rejuvenated once their usable life is expended is uncertain. During the business planning process, the Falher group was approached to identify the possibility of amalgamation between the two plants. Due to geographic limitations, the members of both plants agreed it would be better to remain separate. 3 Financial Situation Note: Financial statement provided is for year ending June 30, 2013 and will be referenced as year 2013 and year ending June 30, 2014 as year Assets and Liabilities As of 2014, the NCSP has $334,297 in capital assets and a liability of $142,325, the majority of which is equity due to members. Shareholder s equity is $334,297, a reduction of approximately $55,000 from Operations The NCSP had annual revenue of $154,264 in 2013, representing an approximate reduction of $20,000 from $90,000 of the revenue is allocated to salaries with amortization and repairs/maintenance to the plant representing the other major expenditures for the year. A gross $23,000 loss was recorded for the year reflecting for the most part the loss in revenue represented an abnormal year due to the grant provided by NSC for the replacement of old equipment. 3.3 Administration Comments From an outside perspective, the plant seems to function on a balanced budget, given the required labour force to provide the services and the overall value of the property (ie. cash flow represents almost half of the overall plant value). In speaking further with the board and reviewing operations/investments year over year however, it is evident that the NCSP has the capacity to function and provide minor upkeep to the plant but does not have the capacity to renew fully without substantial outside investment. This phenomenon is not specific to the NCSP; seed cleaning plants across the province and country have based major capital investment on available contributions from governments. Seed cleaning plants provide a needed service for farmers as well as Agricultural Service Boards in helping control disease and maintain open lines of communication between the producer and regulatory bodies. The Government of Alberta provided the majority of funding required for the construction or reconstruction of seed cleaning plants until The NCSP was scheduled to be replaced two years later. 3

5 As Council considers a contribution to the plant, it must realize that this investment addresses immediate needs but that it will not render the NCSP self-sufficient in the future. The NCSP has accounted for replacement reserves for equipment and repairs but not for the replacement of the structure. 4 Renovations vs. New Construction 4.1 Stantec/Liland Engineering Assessments During the Infrastructure Study conducted by Stantec for the County, an assessment was done of the NCSP. The general review was done inspecting electrical mechanical and superficial components. Even without a full assessment of the foundation being done, the repair value far exceeded the overall plant value. In order to ensure that the NCSP can continue to function in the short term, an integrity report was commissioned from Liland Engineering Ltd. The report confirmed that the building can continue to function for the next three to five years if foundation supports are inspected and maintained on a regular basis. Following both assessments, a decision was made that replacing the existing plant is the only option. 4.2 Value Added With a rising concern around ergot and other disease/funguses, the NCSP is hoping to evaluate the potential of adding a full spectrum colour sorter as part of the construction of a new plant. This would not only be a value added service for members and regular users, it could also generate a new revenue stream for this much needed service. A neighbouring business, Richardson Pioneer, is also looking at a colour sorter however their sorter will only do it through a black and white spectrum which restricts its use to ergot detection only. The NCSP also went through the ROI analysis on adding a treatment component to the plant. The large capital investment (approx. $500,000) required to have this integral to the plant as well as the potential of contamination led the group to remove this from the proposed design. Provisions were made to facilitate the integration of a mobile treater in the short term and given the modular design of the proposed plant, future integration of a treater within the building would be possible. 4.3 New Plants Fairview & High Prairie The Fairview seed cleaning plant was recently reconstructed and is still in the process of being fully commissioned. The project budget was $2.3M but actual project costs ended up being closer to $3.1M. Funding for this project was provided by the MD of Fairview ($500K), Clear Hill County ($250K), MD Peace ($75K) and a $120K Growing Forward grant for technologies used to increase productivity. The balance of the project was done using a loan (approx. $1.8M). In terms of capacity, the plant was processing 400,000 bushels and is a looking at increasing their throughput by 50% with the new plant. Representatives from the NSCP visited with the Fairview plant manager and the following two recommendations were provided: 1. The project manager must be working for the NSCP and not the supplier; 2. Timelines must be committed to with penalties in the contract for additional site days. The High Prairie plant was constructed 5 years ago at a cost of $3.6M. The same plant today is estimated to cost approx. $5M. The plant has a broader market and 4

6 has incorporated a feed mill which is a niche product being developed in that area. $2M was provided for the construction of the plant by the Government of Canada through their Economic Action Plan. This grant was directed at communities most impacted by the loss of employment in the lumber industry. The MD of Big Lakes provided $500K and High Prairie provided $250K. The balance of the funds was raised through a combination of a different class of shares sold to members a loan to the organization. The High Prairie plant has a throughput of 400,000 bushels and more. The NSCP currently handles 200,000 to 300,000 bushels per year and requires a minimum 225,000 to break even. A new plant would have the objective of being able to handle 300,000 bushels or more. 4.4 Option Mobile Seed Cleaning Plants Mobile seed cleaning plants are starting to make their way to some parts of Alberta, especially with the rising need in regions where seed cleaning plants are coming to the end of their usable life. The largest disadvantage with mobile plants is a reduction in control over the migration of noxious weeds and disease (similar to seeds being imported into the County from other parts of the province). 5 Request from NSC for a New Plant 5.1 Project Financing Overview The preliminary construction cost estimate that is being used is $3M, based on constructions recently completed in Fairview and High Prairie. 2014/2015: Council allocated $450,000 for the planning, engineering, and project management fee as well as a land improvement allocation to secure and prepare the required property. 2016: The 2016 allocation represents the budget for the construction of the new plant. This includes a contribution from the NCSP from the replacement reserve and/or divestment of member shares. 2014/ Seed Cleaning Plant (Administrative help 2014, $35,000 replacement reserve 2015) Northern Sunrise County $450,000 $4,250,000 Total $450,000 $4,285, County Involvement The County currently has an appointed Councillor on the NCSP which acts as a liaison between the organization and Council. County administration has supported the NCSP throughout the needs assessment process (ASB/Economic Development) as well as the tender review process (Engineering/Economic Development). 5

7 6 Options Moving Forward 6.1 Capital Requirements New building: A total investment of approximately $4.5M is required from the County in order for the NSCP to construct a new building and develop the lands. Some of the neighbouring seed cleaning plants that were reconstructed received contributions form neighbour municipalities whose farmers utilized the service. This is unlikely to happen in this instance since there are existing, operational plants in neighbour municipalities. Mobile Seed Cleaning: Council could consider providing other forms of support for local farmers by way of subsidies to cover additional costs incurred for the use of mobile seed cleaning services. 6.2 Land Purchasing & Transfers With the development of a new plant, the NCSP has indicated that it would be open to transferring their existing site to the County. The strategic location of the plant would work well for future expansions of the ASB yard and operations. Additionally, should the plant be constructed in a way that the main structure could be converted for other uses, the proximity to the ASB would also make it possible to be integrated into County operations. The County would take ownership of lots 5 and 7 immediately. The NSCP would continue to own Plan A until the existing plant ceases to operate and equipment must be salvaged and transferred to the new building. Plan A would then be transferred to the County as well. Questions from the NSCP membership were raised regarding the value of the land however Administration feels that the costs to salvage and remediate the land outweigh its market value therefore no financial consideration should be given in the transaction (ie. $1 purchase price). 6.3 Asset Ownership Should the decision be made to provide the funding required for the construction of a new building, the investment of public funds should be protected from being divested and distributed to individual members. Administration recommends that the County own all lands and assets except for the existing equipment that would be transferred from the existing facility. 6

8 6.4 Replacement Reserves In order for adequate reserves to be created, the County would be responsible for the replacement of the building and the NSCP would be responsible to create replacement reserves for the process equipment (15 to 50 year outlook based on equipment/building components). The table below outlines costs associated with the project and who would who should be responsible to create replacement reserves moving forward. These are estimates and reserves would be created based on actual costs. NSC NCSP Not recoverable Building and land $1,232,290 improvements Storage/supports $710,712 Process Equipment $1,442,183 Project $143,940 $215,910 Management (40/60) Contingency (40/60) $228,422 $342,633 Demolition/Salvage $62,000 Construction CCE $2,315,364 $2,000,726 $62, Street $250,000 Total $2,315,364 $2,000,726 $312, Lease Agreement and Asset Transfers Projected operations of the NSCP propose that the organization can operated at a break-even point if they do not pay rent, create sufficient replacement reserves for equipment, and expand their business. If Council agrees to proceed with this project, Administration recommends the following terms for a Lease: 1. County Responsibilities: a. Provide funding for initial capital costs; b. Provide free rent for the building and assets; c. Depreciate and create replacement reserves for the building. 2. NSCP Responsibilities: a. Provide all insurance for the building and land; b. Pay all operational costs; c. Pay all future building and land upgrades; d. Create adequate replacement reserves for the process equipment; e. Provide the County with annual financial statements; f. Transfer existing lands to the County. g. Depreciate the residual value of equipment being transferred from the existing plant to the new one over a period of 5 years (approximately $75,000). Future equipment additions and replacements would be the NSCP s responsibility and as such, the NSCP would retain ownership of these assets in the future. 7

9 7 Conclusion The NCSP is faced with the same challenge that many other seed cleaning plants are seeing in the province: fewer members requiring more capacity, being able to service ever growing equipment, limited labour availability, rising operational costs and a shortage of subsidy from governments. Additional needs have not equated to additional revenue. There are no indications that this situation will change in the future. Administration s recommendation is based on protecting the County s initial investment as much as possible. The building and site design would provide residual value for the County should the NSCP cease to exist. The building could be converted to other industrial uses and process equipment could be disposed of. The County would not recover its initial investment given the specialty of the equipment however the investment would not be a complete loss. 8 Appendices 1. NSCP Operations Summary 2. NSCP 5 Year Operational Outlook 3. Financial Statement: Year Ended June 30, Stantec: Seed Cleaning Plant Capital Expenditures 8