Military Privatization

12 Months Ended

Dec. 31, 2012

Military Privatization

Military Privatization

Note 5 — Military Privatization

Under the economics of the agreements with the U.S. government, each of the Military Utility Privatization Subsidiaries should recover 100% of its investment in the assets of the water and/or wastewater systems acquired at the time of execution of the applicable 50-year service contract for each of the military bases. A capital investment recovery charge in an amount equal to the payments due under the purchase obligation is paid to the Military Utility Privatization Subsidiaries by the U.S. government as a result of the purchase of the systems. Accordingly, Registrant recorded the purchase price obligation as a liability with an offsetting receivable of the same amount recorded against the liability, therefore, not impacting Registrant’s financial position.

The amounts charged by the Military Utility Privatization Subsidiaries for water and wastewater services at the respective military bases are based upon the terms of the 50-year contracts between the Military Utility Privatization Subsidiaries and the U.S. government. Under the terms of these agreements, the Military Utility Privatization Subsidiaries agreed to operate and maintain the water and/or wastewater systems at the respective bases for: (i) a monthly net fixed-price for operation and maintenance, and (ii) an amount to cover renewals and replacements, both for the first two years of the contract.  Under the terms of each of these contracts, prices are to be redetermined at the end of the initial two year period and every three years thereafter. In addition, prices may be equitably adjusted for changes in law and other circumstances.  These adjustments can be retrospective and/or prospective.  The Military Utility Privatization Subsidiaries have experienced delays in obtaining price redeterminations and equitable adjustments as required by the terms of these contracts.

Each of the contracts may be subject to termination, in whole or in part, prior to the end of the 50-year term for convenience of the U.S. government or as a result of default or nonperformance by the Military Utility Privatization Subsidiaries.  In either event, each of the Military Utility Privatization Subsidiaries so impacted should be entitled to recover the remaining amount of its capital investment pursuant to the terms of a termination settlement with the U.S. government at the time of termination as provided in each of the contracts.

The receivable from the U.S. government represents amounts billed to the U.S. government that have not yet been collected.  Unbilled receivables from the U.S. government represent revenue recognized on completed construction work but not yet billed pursuant to the terms of the 50-year contracts with the U.S. government and are expected to be billed.

The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized. Costs and estimated earnings on uncompleted contracts and amounts due from the U.S. government as of December 31, 2012 and 2011 are as follows:

(dollars in thousands, except amounts for allowance for doubtful accounts)	2012			2011
Revenues (costs and estimated earnings) recognized on uncompleted contracts	$	62,902		$	36,160
Less: Billings to date	(37,335		)	(31,341		)
	$	25,567		$	4,819
Included in the accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of billings on uncompleted contracts	$	38,139		$	35,064
Billings in excess of costs and estimated earnings on uncompleted contracts	(12,572		)	(30,245		)
	$	25,567		$	4,819
Receivables from the U.S. government:
Billed receivables from the U.S. government	$	12,913		$	7,456
Unbilled receivables from the U.S. government	4,535			6,788
Less: allowance for doubtful accounts	(8		)	—
Total	$	17,440		$	14,244

In March 2012, ONUS received a contract modification regarding installation of new water meters at Fort Bragg.  The contract modification provided for a reduction in the number of water meters to be installed, and the price associated with this revised scope. This $11.0 million project commenced during the second quarter of 2012 and is being performed in conjunction with a backflow preventer installation project. The two projects total $23 million in contract value and are expected to be completed by the end of 2013.

In April 2012, ONUS received a contract modification relating to a $58 million pipeline replacement project which began in 2010 at Fort Bragg, affirming that ONUS will be able to retain the full amount of the cost savings from the use of an alternative pipe replacement technology.  This modification and revision in cost estimates resulted in additional pretax operating income of $820,000 for the work previously performed.  During the second quarter of 2011, ONUS reduced the estimated cost to complete this water and wastewater pipeline replacement project at Fort Bragg as a result of successful negotiations with contractors for a reduction of the costs of providing construction services. The effect of the change in cost estimate resulted in an increase in pretax operating income during 2011 of $2.9 million for work previously performed by ONUS on this project.  This project is expected to be completed by the end of 2013.

In September 2012, ONUS received a $17.6 million contract modification for the construction of water and sewer infrastructure at a new area in Fort Bragg. Construction began in the fourth quarter of 2012 with substantial completion expected by the end of 2013.