City floats agreement with Smithfield on water use

Chris Berendt Staff Writer

August 23, 2013

City officials said the construction of an elevated water tank is needed for the system’s future, regardless of whether Smithfield Packing comes on as a customer, but a non-binding agreement that would give Clinton priority to serve as Smithfield’s main water supplier is now being considered by the company.

Council adopted a resolution earlier this month to proceed with applying for a Fast Track Loan with the Environmental Protection Agency’s Drinking Water State Revolving Fund (SRF). That application will be submitted in September and Wooten Company engineers laid down a proposed timeline for financing and construction this week.

“We expect to get the authorization to construct the tank in September,” Wooten project manager Brian Johnson said to Council during a special session this week. “The application deadline for the SRF program is Sept. 30. Although Public Water Supply does not establish a specific timeline in their approval process, we hope to have a loan offer, by the first of the year. If that is the case, we can go straight to bidding in February, open bids in March and hopefully go to construction in May of 2014.”

The tank construction contract is a year-long contract, so the completion date would be May 2015.

The $1.8 million elevated tank will mean annual debt service of $90,000. If the loan application is not successful, interim city manager Shawn Purvis noted, the city would have to explore a revenue bond option. Johnson did stress that there is no set timeline for approval of SRF applications — some have taken up to a year — but ready-to-proceed projects, such as the Clinton elevated tank, are looked upon favorably.

“So we’re about a year and a half out on this,” said Purvis. “This would finance the $1.8 million. The loan is zero percent (interest) for 20 years, so it’s a very good deal. If the SRF doesn’t go through, we will need to come back and evaluate what our next step in terms of financing is.”

The tank, set to be located at a former well site on Southwood Drive with arterial water lines already in place, would provide a greater amount of water storage capacity for what would be the city’s biggest customer and will also allow for improved fire protection in the southeast side of Clinton and better service in that area as a result.

“It’s about as convenient as a project is ever going to be,” said Public Works director Jeff Vreugdenhil.

And financing for it would be made a lot easier with Smithfield as a customer, which could bring close to $440,000 in annual revenue.

Smithfield, which uses 1.5 million to 1.8 million gallons of water a day, would likely purchase at least 500,000 gallons of water from Clinton on a daily basis once the elevated water tank and the $5 million water plant expansion project are completed, city officials have said.

“We have a draft memorandum of understanding (MOU) that Smithfield is running up their ladder right now,” said Purvis. “It doesn’t tie them to a specific amount of water. It just states we’re going to do this, it’s there and if they have to buy water, they’re going to buy it from us. The caveat is they are going to have to buy water.”

Purvis said once the city has the capacity, through the plant expansion (set for a winter 2013 start and a March 2015 completion) and the tank, to provide Smithfield with water, Purvis said the company will almost be forced to purchase it to stay in compliance with its own water regulations.

“That’s expected to be 500,000 gallons a day,” said Purvis. “It translated to about $36,000 a month or more than $400,000 a year is roughly what that would generate. Just the water that Smithfield would potentially buy would more than cover that debt service.”

Mayor Lew Starling asked what kind of commitment the city had from Smithfield. The MOU reads that it is “not final or binding.”

“Are we just building this on the hunch they would buy water from us?” the mayor asked. Vreugdenhil said it was known through discussions with Smithfield that the company would require more water going forward.

“It’s a fact that they understand they pump their wells 18 to 19 hours a day and they use 1.5 million gallons of water every day. The state doesn’t allow you to pump wells more than 12 hours a day,” said Vreugdenhil, who said Smithfield’s system was already prepared to hook onto the city’s. “Without any guaranteed contracts, it’s pretty much factual that they are going to have to buy water. The state office will tell us that.”

Vreugdenhil said the agreement being considered, while non-binding, would present a partnership for the foreseeable future.

“I have every confidence in this memorandum of understanding we brought the other day, which just says they acknowledge that they would agree that any water they need over their 12-hour pumping capacity, they’ll approach it with us,” said Vreugdenhil.

“Through regulatory measures, they can’t drop another well, but because of their production they need more water,” said Purvis. “They have to get it from somewhere, and we’re that source.”

Vreugdenhil said the city’s system was at carrying capacity for its own customer base already, so on the outside chance Smithfield was not one of those customers in the future, it would still be a “wise investment” in itself, he said.

“So without Smithfield’s need, this is something we need to be doing?” Councilman Steve Stefanovich inquired.

Along with the current customer need, Vreugdenhil said any industry, whether Smithfield, Chemtex — which has assured city officials of its impending location to Clinton — or any others requiring water, may need a large amount down the line, and Vreugdenhil said he does not want to have to say the city cannot help them.

“The answer is going to be ‘sorry we can’t,” the public works director said. “I don’t want the city to be in that position.”

“The worst-case scenario is there is no guarantee,” Purvis added. “We know through what they have to do there should be some purchasing. That $440,000 (in revenue) is a best-case scenario.”

The $90,000 annual debt service can be absorbed from city funds if Smithfield does not come on board, the interim manager noted. Councilman Neal Strickland said was inclined to move forward after hearing Purvis and Vreugdenhil thatthe project was necessary regardless of the revenue. Stefanovich said having that revenue would act to pay the loan off in quick order.

“If in fact we’re drawing $440,000 from Smithfield at zero percent, I would love for us to see us not take 20 years to pay off $1.8 million in debt,” said Stefanovich. “With that kind of cash flow coming in and that kind of debt service, I’d hate to see us bring that back into the budget and drag it out while we’re doing other stuff. If we can spend $1.8 million and get back $440,000 a year, I’d make that deal all day long. If we know they’re going to buy it, that’s a heck of a deal.”

“That’s the question,” said Starling.

Purvis said he felt the city could pay it off at any time. Engineers touted the project as wholly necessary for the city’s long-term needs.

“This tank project has been pursued for quite a while,” Wooten project manager Charlie Davis said. “We’ve gone through several strategies to try to get it funded, and it was tied to Smithfield and now Chemtex has come to the table. Knowing their demands and the burden that could put on the system, it’s beneficial regardless of what Smithfield does for the continuity of your system.”

Chris Berendt can be reached at 910-592-8137 ext. 121 or via email at