citvot

CINCINNATI
For Your Information July 15, 2013 To: From: Subject Mayor and Members of Council Milton Dohoney, Jr., City Manager Walker Parking and Port Authority Memos

Attached are two memos for your information. One is from Walker Parking, one of the Citys consultants on the Parking Modernization and Lease, and one is the Port Authoritys response to the points made by Walker Consulting. It is important to note that the memo authored by Walker came from their position as part of the Citys Parking team. The memo was authored in response to meetings the City had with them in which the team was discussing positioning the City for the best deaL It was part of our due diligence. The Information that Walker used was from an early point In time; the deal was subsequently negotiated from that point to improve the deal. For example, the profit margin used was based on different parking deals in other cities that are not the same as ours. As we know, the Cincinnati model is unique In many ways. ThIs Is just one Instance that illustrates that the Port Is doing a professional job as our partner in Independently evaluating the form and substance of the transaction. The Port is adding value to deal beyond where the City and its consultants handed off the deal to them in March. The Port is continuing its due diligence, as is the City.

Curp, John
From: Sent: To: Subject: Attachments: Laura N. Brunner [lbrunner@cincinnatiport orgj Friday, July 12, 2013 7:30 PM Curp, John Response to Walker letter image.jpeg, ATT00001,txt Walker memo.pdf; City respon se letter,docx

John, Please -Find a response to the letter we recei ved today. with you in more detail next week. Do not hesit ate to

We look -Forward to discussing this call me i-F you like over the weekend.

Sent via EMail July 12, 2013 John Curp, Esq. City Solicitor City of Cincinnati, Ohio 801 Plum Street, Room 214 Cincinnati, Ohio 45202

Dear John, The Port Authority has worked alongside City Administration for months on the implementation of the parking lease transaction. Throughout this process the Port Autho rity has endeavored to understand the Citys goals for the modernized parking system and create conditions under which these goals can be met principally in the areas of financial performance, asset management, and community and customer service.

As part of our current work to finalize the parking lease and moder nization plan, the Port Authoritys due diligence team comprised of internal staff, executive leaders hip, select members of the Board of Directors, and advisers with extensive expertise in financial model ing and bond deals has and continues to spend considerable time performing a comprehensi ve financial review of the deal. This team also is knowledgeable about the contract negotiations betwee n the Port Authority and the parking system asset manager and operators that were selected by the City in February/March 2013 as part of the ParkCincy team.

This letter is in response to the June 20, 2013, memo to the City Administration from Walker Parking Consultants regarding their outstanding questions and concer ns regarding the financial model backing the parking lease. We appreciate that assertions in the Walke r memo are not an accurate portrayal of the Citys position, and City Administration last week assured us that the memo is actually counter to how the City views this deal. Nevertheless, the Port Author ity believes that the inaccuracies contained within a document forwarded by a key City consultant are such that they merit our quick response.

Debt Model Drives Decisions It is important to keep in mind that Walkers comments refer to the assumptions made in a financial model. The purpose of the model is to help the City, the Port Authority, and the ParkCincy team develop a common set of assumptions that can be used to determ ine the size of the upfront payment to the City as well as the amount of the note payment. The actual revenues and expenses will undoubtedly differ from the model.

The model was developed with significant input from the City. The City was considered in its decisions and recommendations about assumptions that drive the model . As is expected in a debt model, the revenue growth opportunities are specific, not speculative, while the estimates on expenses are conservative (i.e., estimated high). These prudent decisions help insure that a reasonable amount of debt is placed on the system. It is our belief that the right amoun t of debt is the amount that allows the City to achieve its goals for an upfront payment while allowi ng the Port Authority sufficient flexibility to operate the system in a way that best services the citizens of and businesses in Cincinnati. It is important to remember that performance improvements to the model, either in the form of increase revenue or decreased expenses, remain in Cincinnati either through the annual note payment to the City or with the Port Authority who has committed to spend this surplus on projects in the City in consultation with the City.

Apples to Oranges Comparisons Perhaps the most significantly flawed information contained within the Walker Parking memo is its attempt to make fair comparison among a variety of on-street meter products and services available in different cities. In its memo, Walker Consulting bases its compa risons on price, yet doesnt qualify the information with what level of service capabilities are included in the price. The Port Authority is basing its purchasing decisions on price, but also level of enhancement to the on-street system that mirrors the Citys desire to modernize these vital assets and position them to enhance economic development opportunities downtown and in City neighborhoods.

Gross Margin is the Wrong Metric The Walker memo is fundamentally flawed when it uses gross margin as the jjy metric by which to evaluate the cost of the Xerox contract. In fact, a focus on gross margin is counter to the Citys entire approach to the parking modernization plan an approach that has been based on investing in and modernizing the system, providing ongoing data-driven strateg ic management and analysis to enable the system to be responsive to parkers and neighborhoods, and increasing the amount of cash received by the City. While understanding the reasons for the gross margin compression is important, the City should also look to balance this with other metrics including improvements to new operating income and incremental cash flow as a result of changes in operations and investments in technology.

likely have the effect of eliminating all of the modernization and ongoing strategy benefits that Xerox is offering. Such a decision would also likely lead to a significant reduction in net operating income as gross revenue would undoubtedly decrease to the levels curren tly experienced by the City as well.

The Walker memo states that the City should seek to cut $1.5 to $3 million annually from the Xerox contract. It makes this recommendation without any acknow ledgement or discussion of the fact that such a large reduction would significantly impact the scope of the work performed by Xerox and would

Gross Revenue Anjjyjs Since Walker has raised the issue of gross revenue, however, we find it necessary to point out the flaws in the memo. First, Walker claims that the City operates the on-street parkin g system for approximately $2.05 million annually (including its $350,000 contract with Hamilton County ). However, this number significantly understates the true cost of the City. The $1.7 million comes from the On-Street Parking program in the Enterprise Parking Fund. The program includes direct costs of the system only meter repair, meter collection, and non-police enforcement. It does not to include any portion of the $555,550 in the Parking Business Services program of the Parking Enterprise Fund nor any of the approximately $150,000 from the general fund in Finance / Treasury for Parking Reven ue Services nor any of the estimated $78,500 in City overhead associated with the on-stre progra et m. (There may be other indirect costs associated with the on-street program as well, but these were identifiable from the Citys budget documents).

Even if only 50% of the Finance and Business Services costs were allocated to the on-street system, the total cost to the City to operate the on-street program today would be approximately $2.5 million. This adjustment alone would cut the Citys operating margin from the stated 71% to 64%. The Walker memo also references its analysis often on-street parkin g operations. While the average of these City may be 71% (the Port Authority was not provided with any backup to support this number), it is our understanding from Walker that the cities actually had a wide range with several having operating margins consistent with the proposed Xerox margin and the true City margin. Also, if the City of Cincinnati is any indication, operating margins for city-run system s likely understate the true costs to run the system as overhead charges for human resources, IT, and finance are often understated or unallocated.

Xerox Management Fee Walker maintains that the management fee for the on-street operato r is too high, in light of what the off-street operator stands to make. This is another inaccurate compa rison. The on-street system will require a much larger workforce and larger scope of management services than the off-street system. It is important to note that contract negotiations with both operators are under way and not finalized.

Broadband and Wireless Communications Charges Walker provided an estimated monthly charge of $5.75 per meter. This is based on using the standard IPS installed software which provides regular updates to the main system. In addition to this, Xerox installs its own software on the meters . This software allows for continuous two way communication between the meter and the overall system . Given the significantly increased level of communication and the ability and need to communicate two ways, the estimated costs are

higher. Once again, this higher level of data collection, and the higher level of customer service that results from this information, is a key differentiator of Xerox.

Projections for Fixed Assets and Equipment Maintenance Once again, these are conservative assumptions in a model. The Port Authority will certainly not authorize the disbursement of funds without fully understanding the costs. The details behind these items are subject to the ongoing negotiations between the Port Autho rity and Xerox. They will also be subject to the annual capital and operating budget, as appropriate, and the submission of disbursements requests from Xerox through the asset manager to the Port Authority for payment.

Declines in Gross Margins Over the Lease Term The currently modeled decline in the gross margin in the later years of the Lease is a function of the assumptions the City selected during its negotiations with the ParkCi ncy team. In the model, expenses are assumed to grow at 3% per year after the initial phase-in period . This assumption was chosen by the City. In contrast, revenues grow at less than 3% annually for two reason s: Enforcement revenues grow at less than 3% because the amoun t of the parking tickets flattens out when it hits the current state cap of $100; and, (2) Meter and garage revenue grows in chunks because rates increas e in 25 cent increments as opposed to a straight line. Since the City chose assumptions underwhich expenses would grow faster than revenues, it should not be surprised that the gross margin declines over time. (1)

Math Error This error was previously shared with the underwriter and has been corrected. There is no impact in the upfront payment to the City as a result of this error. There may be an impact to the ongoing note payments to the City, but the Port Authority is working with the underwriter to mitigate the impact. Consistent with the Citys stated priority, in no year is the annual note payment to the City expected to fall below $3 million.

Parking Meter CapEx While the Port Authority appreciates the data on the other, unnam ed, City that purchased meters at $507.50 per meter, we believe this is not a relevant comparison. This IPS direct price is stated to include the purchase of the meter, shipping, and installation, training, and commissioning. The memo does not specify whether the installation costs assumes that just the meter head is being installed (similar to when the City installed IPS meters downtown on the existing bases) or whether other parts of the meter are also being upgraded.

The Xerox estimate of $592.80 includes not just the purcha se and installation of the IPS parking meter head, but the other installation related items included in Xerox proposal designed to significantly improve the Citys street architecture and system operati ons including: Meter pole refinishing, straightening, installation, including concrete, sealant, and cleaner; Other necessary parts including batteries, locks and keys, meter covers, and meter stickers; Asset tracking, logistics tracking, and warehousing; Old technology removal and site cleanup; Installation of the Xerox software to allow the meter to have two-way communication with the Xerox IT system; Quality control testing. Many of these items are part of the value add that Xerox offers and that were key differentiators of the Xerox proposal and, presumably, part of the reason the City selected Xerox.

I Off-Street CapEx The current numbers in the model are from a previous report that Walker performed for the City. The City made this information available to prospective bidders in the data room. The Port Authority and the ParkCincy team have consistently indicated their intention to hire an independent third-party structural engineering firm to conduct an engineering study. In fact, this was a specific area of concern raised by the Port Authority Board when it approved the lease in March.
It has always been understood that the updated information from that study would replace the placeholder numbers from the old Walker study and that these changes might impact the amount of the upfront payment and the note. I am confident that the City, if not its consultant, was aware of this plan and process. In fact, the City commented upon the draft RFP for the independent engineering work prior to its release in mid-June. Responses to the RFP have been received and we expect the contract to be awarded as soon as it can be negotiated.

Parking Structure

Parking Access and Revenue Contro System (PARCS) and Garage Sweeper CapEx These suggestions were provided to Guggenheim some time ago and appropriate adjustments were made in the working model. These represent very small dollars and do not impact the upfront payment to the City. There may be a small ongoing impact to the annual note payment, but these changes do not impact the expectation of the note payment meeting or exceed ing $3 million in each year of the term.

We trust that this letter will serve to clarify the inaccuracies in the Walker memo so that the public will have accurate facts. Please feel free to contact me with any questio ns or concerns. Thank you, Laura N. Brunner President / CEO

MEMORANDUM
COMMENTS RE: PARKCINCY MODEL
PAGF 1 flf 6
DALE:

tj

WALKER
PAt*NO CONSULTANtS

June 20, 2013 Sam Stephens

660 Lust 7510 SIreel, Suite 210 Indianopohs, IN 46250 Offic.. :317.8426890 Fax: 311.577.6500 www.walkerparking .com

COMPANY:

City of Cincinnati Odis Jones No John Dorseit

HARD COPY:

FROM: PROJECT NAME: PROJECT NUMBER: SUBJECT:

City of Cincinnati Parking P3 13-306510 Comments Re: ParkCincy Model V. Mar 12 2013 vIG

As discussed earlier today and on prev ious occasions with City of Cincinnati and Public Financial Management representatives, we are forwarding the following written desc ription of Walkers outstanding concerns and ques tions regarding the referenced. The follo wing is a summary of items, in order of priority and in some cases, approximate impact on the net present value of the transaction, that have been identified for further evaluation and adjustment: Summary of Recommended Changes to Park Cincy Financial Model Summary Description of Item Reco
1. Projected Erosion of On-Street Margin on

mmendation and Impact

current level. 2.

increase by more than 257% tram the

expense budget, a budget projected to

Gross Revenues We are looking to find ways to reduce the on-street operafing

$29 to $59 million, respectively.

to $3 million annually, depending on back up provided. A $1 .5 to $3.0 million annual reduction in OPEX increases NPV to City by

Reduce on-street operating budget by $1.5

Math error. Meter Phase-In Cashflows, cell G22. We understand this error has been corrected: awaiting updated model showing this correction. Parking Access and Revenue Control System CAPEX. Inconsistent information

3.

needs reconciliation.
4.

Parking Meter CAPEX. Projected meter costs exceed Walkers experience. Parking Structure CAPEX. The figures that

5.

Walker previously provided are placeholders and need to be updated.

6. Garage Sweeper Costs.

Error mistakenly inflates on-street revenues by $641,000 in Year 3 and compounds ihrou gh each of years 4-30, adjusting for inflation. Error does not impact upfront payment, but reduces the Citys NPV by$12+ million. Reconcile PARCS CAPEX Possible incre ase of $145,000 to CAPEX budget in 201 3-2015 . Reduces NPV by $1 .7 million. Reduce parking meter CAPEX based on $507.50/meter vs. $592.80 figure. Savings exceeds $400,000 about every eight year s. Recommend that these figures be revis ed with additional study by a third party.

Recommend replacement every ten year s. Impact on NPV is less than $100,000.

MEMORANDUM
COMMENTS RE: PARKCINCY MODEL
PAGE 2 OF 6

WALKER
rrnNGcoNsuaANrs

DETAILED BACKuP

PROJECTED EROSION OF ON-STREET MARGIN ON GROS S REVENUES

We recommend that fewer dollars be budg eted for on-street operating expenses. ParkCincys 2014 on-street operating projections are more than 257% higher than the Citys most recent actual experience, resulting in a significantly lower projected return on these expenses than has histori

cally been experienced by the City.

The on-street operating expenses shown in the model are projected to grow at a faster rate than operating revenues. The City should expect a private operator to run the parking system more cost effectively than the current operation, not less cost effectively. Therefore, revenues should be expected to increase at a rate faster than expens es, not slower. The Citys margin on gross revenues (net operating income divided by gross revenues) for onstreet parking has exceeded 70% over each of last five years. By comparison, ParkCincys projected margin on gross revenues begins at 45% in Year 1, peaks at 63%, and declines to 56% by Year 30. The citys historical margins ore consis tent with industry norms, whereas ParkCincys projected margin on gross revenues does not match our experience with industry norms. The following table demonstrates that the Citys parking division has experienced an on-street margin on gross revenues that exceeds 70 percent for each of the lost five years. Historical City of Cincinnati On-Street Margin on Gross Reven ues
2007 On-Street Revenues 2008

2009_

2010

2011

9/11-8/12

On-Street Meters Parking Tickets Subtotal On-Street Expenses On-Street Meters and Enforcement
contract with Hamilton

$ $ $

2,382,575

$ $ $

2,489,914

$ $

2,440,675

3,563,81 1 5,946,386
1,631,385

$ $

2,710,796

4,107,748 6,597,662
1,484,103

$ $

3,271.475

4307,522 6,748,197

$ $

3,713,668

3,844,455 6,555.251

3,744,769 7,016,244

3.272,984 6.986,652

county

350,000

Subtotal Net Operating Income

Margin on Gross Revenues

350,000

$ 1,652,893 $ 1,561,592 $ 1,546,086 $ 1,700,241

350,000

$ 1,981,385 $ 1,834,103 $ 2,002,893 $ 1,911,592 $ 1,896,086 $ $ 3,965,002 $ 4,763.559 $ 4.745,304 $ 4,643,659 $ 5,120,158 .$
67% 72% 70% 71%
73%

350,000

350,000

350,000
2,050,241 4,936,411

Source:

city of Cincinnati and Walker Parking Consultants

71%

Walkers experience is that the Citys historical on-stre et margins on gross revenues are consistent with industry norms. Walker evaluated the on-street parking operation element of ten municipal parking systems. The median on-street margin on gross revenues for these ten systems is 71% which coincides exactly with the Citys. Two other municipal on-street parking operations were evaluated which were bid on by commercial parking operators and the margin on gross revenues for these two examples was projected to be 74 and 78%, providing additional evidence that ParkCincys on-street margin s ore below industry norms. (All cities studied by Walker were selected without bias.)

MEMORANDUM
COMMENTS RE: PARKCINCY MODEL
PAGE 3 OF 6

WALKER

PAKNOC0NSUL1NTS

The following table shows a projected reduction in the on-street margin on gross revenues under ParkCincys model. ParkCincy Projected Margin on Gross Revenues
2014
On-Street Revenues M8ters Parking Tickets Subtotal On-Street Expenses Net Operating Income Margin on Gross Revenues

2018

2023
9,998723 9,016,417 19,015,140 6,980,340 12,034,800 63%

2028

2033

2043

$ $ $ $

5,269,822 4,316,598 9,586,420 5,282,500 4,303,920 45%

$ 7,931,386 $
7,777,640

$ $ $ $

$ $ $

15,709,027 6,018000 9,691,027 62%

$ $ $

11,438,664 10,347,910 21,786,574 8,092,127 13,694,447 63%

$ $ $ 9,380,993 $ $ 14,706,189 $
61%

12,750,829 1 1,336,353 24,087,182

17,530,282 11,336,353 28,866,635 12,601,271 16,259,365 56%

Source: ParkCincy and Walker Parking Con sultants

The following are some specific exam ples of where we believe the on-s treet operating expense projections are excessive: 1. The $627,063 management fee in 2013 is 14.6% of projected net operating inco me and substantially higher than Denisons proposed 1.3% management fee as a percentage of net operating income for parking garage s, Xeroxs management fee is also 1603% higher in 2013 than Denisons parking garages management tee. Walker eva luat ed two other municipalities that recently con tracted with a third-party commercial park ing operator to run their on-street operation s. Management fees as a percentage of net operating income ranged from 2.1% to 2.3% of net operating income. (The se were both selected for study without bias.) 2. In 2013 dollars, our experience is that bro adband and wireless communication charges are $5.75 per meter each month and the cost of handhelds is $50 per month for each of 20 handhelds. We recommend that these figures be used instead of the $1 1 mon thly charge per meter projected by ParkCinc y. 3. Projections for fixed assets and equi pment maintenance, computer resou rces, applications, and handheld systems supp ort, operating expense and supplies, and cost reimbursable expenses appear to be high and no backup is included in the mod el to evaluate the details and reasonablen ess of these figures. The following are some questions that we request ParkCincy to answer: 1. Will ParkCincy provide additional writt en backup regarding its project ed on-street operating expenses? (Unlike a pure monetization transaction, this is the Port/Citys budget so there should be transparency.) 2. Why are margins projected to erode over the 30-year period? 3. Why are projected on-street margins less than what the City was able to achieve over each of the last five years considering that the private sector is not obligat ed to pay union wages and benefits? 4. Why are projected on-street margins less than what the City was able to ach ieve over each of the last five years, considering that the private sector is not obligat ed to pay

MEMORANDUM
COMMENTS RE: PARKCINCY MODEL PAGE
4

WALKER

P,RXtNGCONStJ[TAt415

OF 6

union wages and benefits, and approximately half of the growth in parking enforcement income is projected to come from cilation rote increases, and almost one-third of the growth in parking meter income is projected to come from meter rate increases and the elimination of grace periods? (The parking citations rate increases, meter rate increases, and elimination at grace perio ds, all policy decisions made by the City, ore expected to have a significant impa ct on growing gross revenues without increasing operating expenses, which argues for the margin on gross revenues increasing, not decreasing.) 5. Why are on-street labor costs alone projected to exceed the Citys historical total onstreet operating expenses once ParkCincy takes over? What types of staff are included in the projections, how many FTEs of each type of staff ore included, and what are the hourly wages/annual salaries and benefits of each position? Please rationalize far each staff type, why these additional staff are need ed, stating responsibilities and expected outcomes.
MATH ERROR

In the Meter Phase-In Cashflows worksheet prov ided by ParkCincy, there is a math error in Cell G22. This error reduces NPV to the City by over $12 million. The 8.74% annual growth facto r is mistakenly raised to the second power, mean ing that two years of growth are factored into the product, instead of one. This overstates reve nues by more than $641,000 in 2016 and this error compounds throughout the remainder of the projection period. After this error is removed from the model, the margin on gross revenues decreases, further expanding the gap between the industry norm and the ParkCincy proposal. The following table restates on-street revenues, expenses , net operating income, and margin on gross revenues, after correcting the math error described within the previous parograh. The margins decreased by two percentage points after 2016.
Revised ParkCincy Projected Margin on Gross Revenues
2014 On-Street Revenues Meters Parking Tickets Subtotal On-Street Expenses Net Operating Income Margin on Gross Revenues
March 1Z 2013 Margin

2018

2023

2028

2033

2043

,353 $ 9,586,420 $ 15,073.879 $ 18,214,440 $ 20,870,563 23,066,092 $ 27,462,806 $ $ 5,282,500 $ 6,018.000 $ 6,980.340 $ 8,092,127 $ 9,380,993 $ 12,607,271 $ 4,303,920 $ 9,055,879 $ 11.234,099 $ 12.778,435 $ 13,685.099 $ 14,855.535

$ 5,269,822 $ 7,296,239 $ 9,198.023 $ 10,522,652 $ 11,729,739 $ 16,126,453 4,316,598

7,777.640 9,016,417 10,347,910 11,336,353 11,336

45% 0%

60%
62%

62%
63%

61%
63%

45%

59%
61%

54%
56%

Reduction

-2%

-2%

-2%

-2%

-2%

Source: Parkcincy and Walker Parking Consu ltants

MEMORANDUM
COMMENTS RE: PARKCINCY MODEL PAGE 5 OF 6 PARKING METER CAPEX

WALKER

PARnNGCONSUTANTS

In 2013 dollars, we know of a U.S. city that recently bid a 1,500-space meter system. PS, the manufacturer of the parking meters, submitted a price of $507.50 per meter which includes a cost of $475 per meter (>1,000); $7.50/meter for shipping; and $25/meter for installation, training, and commissioning. We do not recommend purchasing a warranty. Therefore, we recommend that the $507.50/meter be budgeted instead of the $592.80/meter proposed by ParkCincy. OFF-STREET CAPEX Revised CAPEX figures are needed to replace Walke rs temporary placeholder figures provided in a January 22, 2013 memorandum to the City. These figures were based on a 2009 Walker limited condition appraisal which was updated in 2013. In this correspondence with the City, Walker stated, Please note that this memoran dum, including the 30-year figures provided herein, is based on many assumptions and has significant limitations. The actual expenditures will vary from those shown herein and in some cases, the actual expenditures could vary materially from the budgeted figures shown herein. Subsequent, more detailed study, including additional levels of testing and a more rigorous analysis, is recommended. This further study remains to be completed and the results of this study are expected to generate figures to be used instead of the ones provided by Walker. The impact of replacing these off-street CAPEX figures is unknown. PARCS CAPEX On 2/20/13 Denison supplied Walker with a CAPEX budget for parking access and revenue control (PARCS) equipment and this budget totaled $999,165. Years 1, 2, and 3 (Row 133 of the models Consolidated Summary Cashflows worksh eet) total $854,165. Therefore, the amount shown in fhe memo exceeds the amount shown in the model by $145,000. This needs to be reconciled. Until the lower figure can be confirm ed as the correct figure, we suggest budgeting the higher figure of $999,165. Following are the figures that Denison most recently provided: PARCS CAPEX Provided by Denison
jnciIiy___ g4yy__ Broadway Fountain Sq South Fountain Sq South Garfield Garfield Gramercy Gramercy Third & Butler Lot TOTAL
Source: Denison Parking

Item
New Parking Equipment Monitoring Equipment New Parking Equipment Monitoring Equipment New Parking Equipment Monitoring Equipment New Parking Equipment New Parking Equipment

Amount

$25,000
$214,445

Year 2013
2014

$25Q
$232,238 $25,000 $225,327 $182,155 $45,000 $999,165

2013
2014 2013 2015 2013 2015 2014

MEMORANDUM
COMMENTS RE: PARKCINCY MODEL
PAGE 6 OF 6

-Si WALKER

PARKINGCONSUITANTS

Additional PARCS CAPEX dollars should be added every 7-10 years. The model shows only one investment over the projection period. This is unrealistic as the equipment will require replacement every 7-10 years. GARAGE SWEEPER CAPEX Garage sweeper costs are shown in the model in Years 2 and 3 but not repeated. It is not reasonable to assume equipment will last the remainder of the projection period without a replacement. We recommend showing replacement of this equipment every ten years and adding dollars to the CAPEX budget. These dollars should be adjusted for inflation in out years.