Transcription:
Mike Bauer (
So, As if conditions weren't challenging enough on the city county level let's add severe drought conditions and strengthening regulatory requirements with our waste water and water sector panel. First I'll welcome Jenny Poree Jenny is the Sector Lead for the water and sewer utilities group for S&P global. Jenny is chair for the public finance group and is the primary author of the water and sewer criteria. Joining Jenny is Sophia Skoda, Director of Finance at East Bay Municipal Utility District. The district's infrastructure serves water to 1.4 million customers, and wastewater service to almost another three quarter of a million more. Sophia brings valuable experience as a former financial advisor to public clients in the water and wastewater sector. Then also representing the issuers perspective. We welcome Nikolai Sklaroff is Capital Finance Director for the San Francisco Public Utilities Commission where he is responsible for developing implementing and administering the San Francisco public utilities commission capital financing activities. Nikolai has over 30 years of public finance experience as an investment banker ratings analyst financial advisor and issuer. Then our moderator for this panel is Margie Backstrom. Margie is Managing Director and Head of the Western Region Infrastructure Group for Morgan Stanley's Public Finance Department. Margie's clients includes some of the largest issuers in California and the country serving several very large issuers in this sector. Jenny I believe you will get us started with this sector overview. Thank you.
Jenny Poree (
Great. Thank you. That thank you very much.Well it's a pleasure to be here. Thank you so much for having me. It's rare that someone's asking my opinion at home since I have a preteen in the house but it is nice to be here. Speaking about the water and sewer sector. It's been one of the most resilient and stable over decades, including even recently during the pandemic but we are certainly facing I think some really significant emerging challenges. And, I'll walk through how we view the sector as well as home in on some that are very specific to California. Perhaps we'll start with rate affordability because that's really what underpins the strength in the sector. The ability of utility managers to pass through costs related to capital as well as operations is really critical to the strength in the sector. What we have seen is that there's still significant cushion with respect to rate flexibility but that's becoming increasingly strained particularly in places like California where we're talking about the cost of moving water hundreds of miles from this Sierra Nevada or Colorado river to the major population centers. And, we expect that this rate flexibility may be increasingly constrained when we have to prepare for mounting climate and regulatory pressures. Thinking through the climate situation is a challenging one. We certainly have issues of drought sea level rise wildfires and a number of other events that have really increased in magnitude and frequency. That's on top of a situation where we have hundreds of billions in backlog infrastructure needs nationally and significant needs within the state. Even, more specifically we think that the federal landscape has improved with respect to potentially some additional money from the infrastructure bill. But unfortunately we don't see that as a panacea. If you look back to the 1970s the federal government really supported 60% of the capital needs in the sector. And that percentage is down to 10%. In addition the federal government is really not had an affordability a rate affordability program on the water and sewer sector like they have in the electric sector for our counterparts. There's gonna be a pilot program which may lend some support to this affordability issue but we're hoping that the federal government will be part of the solution. But, I think from a realistic standpoint it's not gonna be really the panacea. The significant capital burden that water and sewer utilities are facing is even more pronounced because they're not nice to have infrastructure improvements. These are really need to have if you look at the percentage that's either driven by consent decree or necessary infrastructure for drought resiliency and then that's compounded by the costs related to inflation staffing shortages supply chain stresses. It's really gonna be a real challenge for water utility managers to meet all of the needs on the infrastructure side while still balancing rate payer affordability and as such that's something from a rating agency standpoint that we're really looking at coverage may drop a little leverage may increase a little but we're also balancing the importance of rate affordability and trying to look at that holistically in terms of how that affects the overall credit we'll touch on drought later. But just to give you an idea usually include just the state of California. I'm talking at a California specific conference but the drought has really become very regional. It's not something that is just California supply because we're talking about supplies that are shared by multiple states. And in some cases even Mexico we're talking about drought alternatives options that will serve entities beyond just a specific utility. But, you can see from this snapshot that we're in a really significant period of stress when it comes to water scarcity you can also see that this really goes beyond hydrology like California is used to managing periods of hydrological variability. We've been doing that for decades and that's nothing new. What's really new is the magnitude and severity that's being driven in part also by temperature. The extreme heat has really affected the snow pack the soil conditions. And as a result even when we have rain we're not really able to access that at the same level. So from a credit standpoint some of the solutions with respect to drought resiliency are even more critically important because we think that this will be more prolonged and we really need to get credible solutions. We do believe California's well positioned. If you look at the medians relative to the national medians coverage cash and leverage actually compare quite favorably. And that's been the case like over many years. And, in part that's because of managing through these periods of hydrological volatility and how utilities have needed to meet rising conservation or the different demand scenarios. We've talked a lot about some of the challenges that are being faced and we'll go into the regulatory challenges in a bit. But, I wanted to also say that part of what's driven the underlying stability within the sector is that management is extremely strong for California utilities. And that's something that is very much within the control and something we're quite focused on. If you look at some of the financial and operational management attributes that we've looked at credible long term strategic plan planning financial policies emergency preparedness and comprehensive asset management are all increasingly critical. Having forecasts that take into effect different hydrological scenarios as well as different population assumptions are very important to our analysis. If you're not building in stress scenarios we'll have to build in our own. And, in most cases they'll probably be more conservative perhaps than what you would've envisioned. So, it's really important to us that we're working with issuers to understand the potential stress that we'll be faced. Importantly given a lot of these emerging challenges transparency and accountability is critical. We recently released a report where we talked about the importance of transparency in the market. We certainly know we're not attorneys and we're not suggesting what you put in your disclosure documents. But what we are saying is that transparency and accountability is important because it affects your stakeholders. It affects the way the market views debt your rate payers and how they may view potential rate increases the government related governments that you work with. And, so overall it can affect rate setting flexibility which and the cost of borrowing which from our perspective is really critical to the underlying credit quality. In addition the lack of disclosure around a risk doesn't mean to us that that risk doesn't exist. It might just mean that management doesn't have a firm grasp of what the risk is and perhaps isn't able to mitigate and adapt to it. So, we're very focused on making sure that transparency and accountability is there. And if you look at the percentage 38% of our negative rating actions have resulted from weak transparency. And with that I'll hand it over to Mar to start the Q and A.
Margie Backstrom (
Oh I think we'll go next to Sophia.
Jenny Poree (
Sophia. Oh good. I'm sorry, Alright.
Sophia Skoda (
I'll take the clicker from you. Thank you. Sophia Skoda. Again, very pleased to be here this morning with all of you talking about two of my very favorite topics water and wastewater. This is a picture of our main primary water supply reservoir party named after one of the early governors of the state. And as you can see it's very brown. This is basically a depiction of current conditions. So much drier than than normal. There was a time about 18 months ago where I switched my zoom background to this photo from our green one that we normally use because it just wasn't realistic right. It wasn't transparent. So, when we look at east bay mud we're the 13th largest retail water system in the United States and the second largest retailer in California. I like to say that because even though Nikolai has more wholesale customers we actually have more retail customers about 40% more. We also provide waste water treatment and disposal to a subset of that and so you'll see sort of the hatched area that's to the left of darker green area. And the reason why we only provide wastewater treatment to a subset always taking the opportunity to educate on water wastewater is because it just doesn't make sense to pump wastewater from the Eastern portion of our service area over a set of Hills right? From an energy efficiency standpoint. It just wouldn't make sense. So, that's why we only provide in the in the Western area there. And, we only provide wastewater treatment and disposal not collection. So, why you might ask. And the reason is because those collection systems were in place when these communities were built. so going back 150 years in the case of Oakland for example so Oakland Richmond Piedmont Berkeley these are all cities that had collection systems and all that wastewater was just feeding right into the bay untreated. And, the essentially the rate payers are in the voters. At some point basically in the forties said we it smells so terrible. You have to do something and you're a mud under the mud in California. You do have the ability to provide these services. And, essentially the voters asked our board of directors to essentially provide this treatment. So, that's kind of part of our history. And when you kind of look at our mission statement we really have come to embrace starting kind of in the seventies this role as an environmental steward of the McCluney watershed. And, in some years the McCloy river of which we are the primary stored contributes up to 40% of the entire California salmon commercial population which is totally wild when you think about that. So, that's kind of about us and things that we're we're particularly proud of. We've just celebrated 35 years of what we call our equitable service delivery program to low income customers. So, we are one of the first programs in the Western United States to be able to offer that. And, we also see ourselves as a California leader in water waste water services. We're a lead agency in five GPAs. And, then most recently we are the founding partner with UC Berkeley for a center for smart infrastructure. So, those are that's a little about us. So, in terms of what we see as our challenges Jenny mentioned some of this I mean infrastructure is clearly a huge huge issue. I mean we've all seen the news about Jackson recently and it's horrifying right. And, why did that happen? It was an inability of essentially dead ends and the leaders of Jackson to say we've gotta raise rates. We've gotta invest in this infrastructure. I mean that's the bottom line right? Nobody wants to and you have to I'm gonna make a personal editorial comment at this point not necessarily reflecting the views of east bay mud but I believe that some of that goes back to kind of the basis of women are the ones that have always been responsible for getting water at the well in Europe and even in developing countries. And, even in the home women still continue to be the ones that are cooking that are responsible for leaning the home cleaning children bathing all of that sort of thing. And I think that there is some kind of like latent hidden kind of a thing about like oh well we don't need to invest in this. It's not that important roads. That's what's really important. So anyway personal editorial comment over so, aging infrastructure huge huge issue and the new and different infrastructure that we really need to deal with. Climate change related realities. I mean we've all seen the news just recently about the algal bloom right. In the San Francisco bay. Well that's really about nutrients right? And so what are we gonna have to do to deal with nutrients? We're gonna have to install pretty complex pretty important and expensive infrastructure. So, so these are the kinds of things that that are the top of our minds as water waste water managers. The second also mentioned by Jenny compounding drought so this changing weather unpredictable not in ways that we've kind of seen before and the sequences being very different the cost to deal with with this and the many more variables that become more and more complex it's really a a multifaceted beast. So these are the things that we're thinking about. So how do we garner public support for rate increases for these expenditures that we really have to make as public agencies it's a significant technical financial and messaging challenge all of those. Okay. So, moving on additional challenges I love that I found this graphic on there's a professor in Wisconsin Manor who writes a lot about affordability and water. And, I love it I mean this is a game that goes back almost a hundred years monopoly water works and there's that pay your poor tax of $15. So, there's the governor's shutoff moratorium here in California and is there gonna be an expectation of continued sort of free service as a way of life? there are affordability challenges and I'm really glad that that's the case very early in the pandemic. I sat on an an AWA panel and I said the federal government has to wake up to its responsibility to provide water and sanitation to people of the United States of America because there is a responsibility and the growing income inequality that we've seen essentially has resulted in where we are today. But while awareness is at an all time high we don't have great answers in this two 18 world in California and we don't have great answers nationally elsewhere either. It's it's really a challenge. And Jenny mentioned the exact same thing. and then the last thing that I I'll mention today obviously many many challenges but the state's housing a shortage and that was mentioned on our prior panel as well. And, so how do we as California water agencies ensure that we are not contributing to a housing shortage right. And there are a lot of different ways that we can do that. I mean on a very kind of basic level one of the discussions we've been having internally is we obviously don't wanna staff for peaks. So, we keep the number of crews as efficient number as possible but all of a sudden it'll be this (16:16) of okay we all need to connect right now. Well when we if we if we result in a three month delay on a project for an apartment building with several hundred units to connect that's millions of dollars for that developer. and yet here we are trying to be efficient right with the number of crews cuz we don't wanna have too many crews. And, so we've gotta think more strategically about how we partner essentially with the development community and with the state so that we're not the ones that are contributing to a housing shortage. And that Delta of just a couple of months can be the difference between a project that works financially and one that doesn't and we don't think about that as water agencies necessarily. So, those are some other sort of folk things that we think about in terms of opportunities. I do think that this wider public dialogue on climate change does provide water and wastewater agencies with an opportunity to engage with the public on our challenges and on solutions but are we gonna take that opportunity that remains to be seen and then with respect to drought surcharges I think that's a real opportunity. So, east bay mud I believe developed the first set of drought surcharges that actually were passed under prop two 18 so that we wouldn't have to go out to voters in a kind of panic. So, sort of pre-planned set in place hopefully the rate payers become customed to understand how they work and then you can kind of use them on a regular basis. So, we believe that those really are going to assist our our our Western water agencies with revenue stability incentives to conserve all of that. And, then flow restrictors that's something that that we've all started to hear a lot more about. That's a photo of of an actual flow restrictor. and it's literally just a little piece that you slip in at the water meter in the connection to the home. And, what it does is it limits the amount of water that's going into the home. Now there's enough water there to be able to flush your toilet fill up your water cattle and be able to boil water for tea or cooking or pasta or whatever you're making. But you're not gonna get a nice shower. Let me tell you. So, I I did pilot that personally at my house when I had a child that was still in diapers. And, I felt like that was really important because you I think that there are a lot of people that wanna be like you water agencies like you just don't understand what it's like to be poor or any of that. It's like no that's not what it's about. Like this is about the fact that we have to manage the reality that we wanna be able to supply water to folks for meeting their basic needs but we have real revenue requirements. And, if we're not serious about how we manage our finances then we can't be serious about being real partners and making sure that water supply is available. So that's important. So, with that I will close my comments and I'm going to pass it on to my esteemed colleague Nikolai.
Nikolai Sklaroff (
Thanks so much Sophia. I have to tell you sitting up here and getting a chance to look back at on all these faces. It's wonderful. First of all to see so many familiar faces from colleagues but it's also so great to see new faces in the audience and to actually be here together in person. Can I just ask everyone who's an issuer in the room works for stain local government. Okay. And then how many of you are from Northern California? Great. How many are from Southern California? Wonderful. That's real helpful to understand I'm Nikolai Sklaroff off I'm capital finance director for the San Francisco public utilities commission as Robert mentioned I've been in the business for a long time but in this position for four months. So, you'll forgive me if I rely on a few notes here. For those of you who are not familiar with the SFPUC we are a department of the city and county of San Francisco. We derive our bonding authority from the city charter but we serve a much broader regional population as Sophia alluded to just a moment ago. Because I'm new to the organization and I'm gonna be focused much more on debt financing. But let me tell you a little bit about what we do just to understand our organization. If you're not familiar we do provide water power and sewer service. Each of those utilities has a very different customer base as well. As a result of that since we're touting our credentials here we're the third largest utility in California but what's particularly remarkable is that we've got employees in seven counties around the bay area and up through the mountains in the Sierra. We deliver some of the pures drinking water in the world to 2.7 million people in the bay area and to put that in perspective San Francisco at post pandemic has a population of about 815 000. So, as you can see two thirds of our water delivery and about half our water revenues come from outside San Francisco we also deliver clean power of course hydro power from up country. But also we provide clean power to the businesses and residents through our clean power SF community choice aggregator by the way that building in the photo is our headquarters building. If you see the little Spire to the left that city hall but what's remarkable about working in this building is that it's a lead platinum building but it is designed to recycle the water in the building has solar and power generation from wind as well. So, with that let me focus on on debt. And these are some of the issues that keep me up at at night particularly four months into the job. The key one I think is just managing the disclosure the compliance the whole process of administering debt for 6 billion across three enterprises as a former banker. I've said this often to people that I'm constantly amazed at how much work is left behind once the deal team leaves and I think would be healthy for everyone in our business to switch roles just to understand that difference. And, we do that with a pretty lean team and I want to think and acknowledge two of my colleagues Edward and Dan who are here in the audience. We just onboarded a new employee last week but we're still recruiting another analyst right now. And I think in that regard we're facing the same challenge that many of you are facing here in the room which is that we've had post pandemic a lot of turnover a lot of retirements and all of us in the public sector are are having a tough time filling those roles quickly enough particularly in San Francisco. It can take us six months or more to fill a role. Well we're in a tech city and in San Francisco and these tech firms 6months 12 months that's as much time as people stay with a firm let alone go through the recruiting process. The next thing I'll mention is that we maintain seven ratings on four different credits. One of those credits doesn't have debt associated with it yet. and so we're dealing of course with Jenny and her peers and as with Sophia and many of you, we want to have the best ratings so that we get the best interest rates. That's common. but for us it's also a legal matter. our city charter requires us in order to give us the ability to issue revenue bonds to maintain high ratings. And our management is interpreted that's mean minimum of double a credits. So, we are finally attuned to maintaining those ratings. And, so one of the conversations we're having now and we expect to have lots more conversations with the marketplace and our MAs and underwriters is about debt metrics and understanding what really is too much debt and new ways of evaluating that debt we'll ask them all. I suspect Morgan your colleagues I know what your answer's gonna be. We're managing very robust green bond program. One of the things that really attracted me to coming to the S F PUC was the innovation that the PUC has led in green bonds. I had the good fortune as an investment banker to work with the PUC on their very first green bond back in 2015 when it was still a challenge frankly to convince people that green bonds were worthwhile. And, I take no credit for what the PUC has done in the meantime in terms of the innovation of first use climate bond initiative certification first to list internationally on the London stock exchange in recognition of the fact that certain international buyers require that as a threshold to purchasing. So, very excited about that. But as that market matures I think we're gonna be spending a lot more time carefully making sure that we are deriving the maximum benefit from the innovation that we've already done. And as somebody who has been enthusiastic about green bonds I'm looking through it now through an entirely different lens. There is a considerable amount of work a considerable amount of cost involved. And I think initially we all thought there's not really an economic advantage but it's the right thing to do. And, today we see there is a little bit advantage but there is that significant cost. So, we wanna derive as much benefit as we can from that. The next thing we're working on is we have commercial paper programs for all three of our enterprises. We do our construction and our financing a little bit different than other entities perhaps here in the room. We are not financing projects on a standalone basis. We're doing them on a program programmatic basis. So, right now we're doing wastewater for climate resilience. And we have many projects going throughout those seven counties at any time. And so we use our commercial paper to manage that and to manage our on spend bond proceeds. And, that's a really key part of our program. The next thing we're working on is we have a tender program we've been using a lot of low cost WIFIA and SRF financing. We've also been using notes to manage that on an interim basis. We're following the Bab subsidy threat. For those of you who weren't around in 2009 2010 the federal government had provided a program where we could issue taxable bonds instead of tax exempt bonds and receive a 35% subsidy. Well, that's that worked out very nicely at the time but since then federal seek sequestration has reduced the subsidy we're getting but it's still an incredible subsidy. And, we get 25 and a half million dollars for water wastewater and some commercial I'm sorry some certificates of participation that we issued through the city due to some drafting errors. There is a risk that that subsidy will go away. The great Emily Brock will be here tomorrow the federal liaison for GFOA been working closely with her to track this and advocate for restoring it. But, if that goes away that would be a major hit for us. And many of our colleagues and peers in the water sector. There's been a lot of discussion already about the drought. I won't go back over that except to say even with that great reservoir HHE in the Sierras and the great access to clean water that we have we too are looking at alternative water sources. We have a robust program to identify alternative water supply. Some of that may be desalinization expansion of reservoirs but that will be a major part of our program going forward as well. In this new interest rate environment we're trying to figure out how to make the best use of these different programs WFIIA SRF and for us we have dam. So, we can take advantage of the army cores new WIA program for those but there is while it seems obvious that those have very low interest rates we're also trying to manage them well in our program and preserve our ability to renegotiate those rates. So there's a lot of coordination that goes on behind the scenes. We're fortunate that we have additional staff who do nothing but help us in procuring those facilities. The last thing I'll mention is that we have nearly 6 billion of new debt that we're gonna be in issuing in a volatile period. And to put that in perspective as I just said that 6 billion of new debt almost matches all the debt that we've issued and have outstanding to date. So, very quickly our city charter requires us to put together a 10 year plan. It's an 8.7 billion capital plan. It is shifting we we're shifting we've completed much of the water program. And, now the emphasis is shifting more to wastewater but as you can see there's still sizable spending on water and power. And then we have bond plans out for the next 10 years. All three of our enterprises are scheduled to issue bonds this year. We're taking a careful look right now and we'll be presenting our plan to the commission later this month with what the timing of those will be. But those are the issues that keep me up at night and look forward to talking more.
Margie Backstrom (
Great. Thank you. Olai well I think we'll go into the Q and a part and maybe I'll start off with some questions and hopefully leave time for a couple questions from you all. But so as we think about those issues I do think there are some additional questions that would be helpful to hear from our panelists about and we wanted to drill down and into the challenges that water and wastewater issuers in particular are facing with volatility drought wildfire increased stormwater regulatory focus. and then the challenges in borrowing to rising interest rates inflation. I think Dr. Pixa referred to it as violently ping ponging up and down. I had to write that one down. I was like so the first question to our panelists relates to something each of you mentioned at some point and that's drought every week we seem to have a new front page story whether it's the LA times or the New York times about the challenges with California the Colorado river but I think it relates to issuers up and down the state no matter what their source of water is, and maybe Sophia you can start by telling us I you mentioned the drought surcharges but has east bay mud have you withdrawn funds from your rate stabilization fund? are you having to make additional capital investments? So kind of bringing it back to the debt side what are some of the drought implications?
Sophia Skoda (
So, Just in terms of rate stabilization we did not draw draw down our rate stabilization funds this last year. when we were sort of projecting at what would what would our costs look like associated with drought this year? We were looking at about 60 million and the surcharge the 8% that we put on at the end of fiscal year is anticipated to have brought in about 30 million. So, we did draw down reserves but we don't anticipate the need to use the rate stabilization fund from a credit perspective. And, it's interesting. I don't know if any of the other issuers have this problem but we often when you're in front of your board, they conflate sometimes rate stabilization fund with not understanding that really that that's about coverage and that it's so did we draw down rate stabilization funds? And you're like we drew down some cash. We did not draw down any rate stabilization funds but yeah. And then in terms of capital impacts we try to kind of think long term. And so, a couple years ago during the last sort of drought it became clear to us that I mean I remember very clearly I went shopping in Walnut Creek and I went into a Pete's coffee and I, had my coffee and then I said oh could I have a glass of water with ice? And so they got me this glass of water with ice. And I, was like wow this tastes really bad. The ice must have been in the fridge for a long time or something. and then I finished my shopping and then met someone for dinner at a Japanese restaurant. And I said can I have a glass of water? and then I drank the water. I was like oh that's us. And, it it was only being served kind of to that portion of our service area which is which is why I hadn't tasted it at home because we weren't we I was not receiving that water from where where I was drinking. And it became very clear that we were gonna have to make some capital investments because that that that changing kind of water supply that that water had come in through from the Sacramento river essentially. And, it's a different water right? And we've been used to this very pristine snow melt amazing tasting water. And, that's not gonna be case with this new kind of world that we're in with climate change. So, we usually kind of issue debt after the fact is those of you who work with us on our debt portfolio now. But we are awarded a project about six months ago for a major UV project at Arinda which is our the kind of heart of our of our water treatment system. So that we don't the next time I go and order a glass of water pizza hopefully a couple years from now that won't happen again but it was I mean it was very real and we were getting a lot of kind of customer kind of complaints and kind of this sense. And so it's also sort of interesting because here we are sort of chasing this like okay that's an aesthetics issue. There's nothing kind of in terms of meeting regulatory requirements. But, aesthetics are also important to our customers. Right. But it is gonna be interesting is that we kind of move deeper into these more marginal water supplies. How is that gonna impact our capital programs and what are those political choices that are gonna be made? and how's that gonna impact affordability and on and on so right.
Margie Backstrom (
Yeah Right. Absolutely. And one aside before I ask Jenny for her thoughts but my children have grown up with HHE water and there's such water snobs. There you go to other places and complain but Jenny any thoughts about rate structure that you wanna add?
Jenny Poree (
Sure, I mean we did historic look back about a month ago and we looked at the whole Western region and how different hydrologic cycles have affected financials just from a credit standpoint. And I'm sure it comes as no surprise to you that the drive drought years tend to be actually better financially than the wet years that said looking on a forward basis conservation's gonna be in our view a critical piece of the puzzle and any alternative supplies are gonna be significantly more expensive than traditional sources which builds in fixed costs and potentially lower demand. So, those issuers that have rate structures that support different environments different fixed costs situations versus being completely reliant on volumetric revenues. We view even more positively than I would say we did 20 years ago. And, you'll see in our most recent criteria change we added a sentence bringing rate structure to the forefront. Whereas I would say there was more of an agnostic perspective on volumetric versus fixed but certainly given the changes in the industry entities like east bay mud that have drought surcharges or those that have the ability to pass through and perhaps take that layer of politics out of rate setting something that in the drought we view as very important.
Margie Backstrom (
Great. Thank you. So, now let's switch gears a little bit and talk about the market. I know that we've talked about it. A number of times all the various panels have have talked about the extraordinary volatility that we've experienced over the last few years. And, Nikolai perhaps I can go to you. are there any strategies that you're utilizing or considering in to in order to bridge this period of volatility for example are you borrowing more frequently to kind of dollar cost average or less frequently to reduce your exposure to the market? Can you talk a little bit about that?
Nikolai Sklaroff (
So, obviously this has been an extraordinary time in terms of interest rate movement and it has had a profound impact on refunds but in terms of new money a little bit like a battleship as you as you saw up there we've got our debt plans set for the next 10 years. So, we of course take a look at the market and fine tune along the way but we need to keep that capital program going and making sure that we've got the resources. So, some of the things that we are doing differently is not every issuer is taking advantage of the federal and state programs. So, we're taking advantage of borrowing from WIFIA. We're negotiating our third WIA loan right now it's 618 million. And we'll be using that for a whole array of wastewater climate resilience projects. We're also looking at how to manage those together. So, that's that's that's a key part of it but we're not able to simply put off financings based on what's happening with the interest rates.
Margie Backstrom (
And do you wanna touch a little bit on refundings?
Nikolai Sklaroff (
Sure, So as you know all too well Margie, we had very large refundings authorized before I I joined the PUC very large refundings and of course the work went on to get those accomplished. The team was able to price a much smaller waste water refunding and the water refunding didn't get done at all. So, we are continuing to monitor refunds very closely and I have to get lots of credit to the investment bankers in the room. We're getting extraordinary ideas and a lot of innovative ideas things like long forward refunds where we're essentially borrowing the savings or tendering bonds but we're not desperate for savings. We're really very mindful of optionality of our refundings and are gonna be proceeding with those pretty carefully.
Margie Backstrom (
Great. Thank you, Well maybe one more question and then I'll go to the audience so you guys can all get ready but Sophia, do you wanna talk a little bit about some of the capital investments you've needed to make or are considering based on regulatory requirements? I mean there have been so many whether it's storm water PFAS lead service lines which I know are not as much of a problem in the west as they are in some of the Midwest and Eastern cities but can you talk a little bit about
Sophia Skoda (
That? Yes absolutely. So, we definitely see as I said earlier a lot of kind of capital in our future and much of it driven by regulations. So, on the wastewater side I mean there will be tightened nutrient limits. I mean we expect 2024 is kind of the next time that we're up for our permits and on the wastewater side I mean I see zero chance that we're not gonna have tighter limits than we have currently with respect to PFAS up until now we've had this very pristine sort of water but again, with these changing water sources it's a reality that we're gonna have to deal with. And so again some of these very minimal treatment methods that many of us have been able to get away with when we've had these pristine supplies Portland San Francisco east bay mud we're gonna have to look at that differently on the lead service lines as you said in the west we've been pretty lucky. I mean in our case city east bay mud we have kind of a handful that we still sort of have out there. But again we manage our system with respect to kind of how we treat our water and looking at the PH of that to make sure that we're not leaching essentially from that that system. And then of course we have testing and all of those types of things as well but but yeah so those are all things that we're seeing. I mean we've also seen a lot of legislation that ha the state has kind of tried to being respectful of the state but push off onto local agencies in terms of annexations and saying Hey, well you need to help solve these serious water supply problems. And we've been pretty good and able to kind of fend off saying like Hey we've got a lot in our on our plates and this doesn't make sense. It's not strategic. We understand that this is a problem but this shouldn't be our problem. So, I mean there's those kinds of things. and then there are the affordability challenges that Jenny mentioned as well where we're gonna have to be making more investments in our water and waste water systems. And, that just compounds the affordability issues that we're already seeing. And this comes to the income inequality and some of the homelessness that was talked about in some of the earlier panels all of these issues sort of compounding but it's one of those things where it's still impacts us.
(
And, So as agencies it's like how do we make those right decisions? How do we communicate that to the public? and I think that we're going to have to as water and wastewater managers work more effectively with our communications peers where communication is it can't be kind of like a third class citizen I mean this needs to be front and center. It's like I remember early in the pandemic we all heard from our yoga pant purveyors about like oh the pandemic or black lives matter or whatever the thing was that was in the news. And, as water and waste water agencies we've been a little bit like nobody wants to hear about it. They just want the water to turn on and they wanna flush the toilet and have it go away. And, we've gotta get outta that mentality if we're gonna be asking people to spend money on the investments that we need to make. Yeah.
Margie Backstrom (
Yeah.
Nikolai Sklaroff (
Margie, If I just add as we are looking at these alternative water supply solutions, some of them are involving partner agencies and the like and So I think one of the things that we're gonna be seeing and those bankers and MAs who who are looking forward have already been zeroing in on ideas for this they're gonna potentially involve using different financing tools than all of us have been used to in the past because this solution is not pthe roblem that we're facing is not unique to any one of us. We're all facing this this drought situation and this need to supply more water. and particularly in a city like ours where not only are we seeing growth in the surrounding bay area. But, in San Francisco this November there are several ballot initiatives that are gonna fundamentally change if they pass how residential development is approved. So, there is there is a not only the need that we're struggling with today but the future need that we have to solve as well.
Margie Backstrom (
Absolutely. Well maybe we'll go to the audience. I think we have time for one question and if no one has one I can I have one but any questions from the audience? Oh Esther.
Audience Member 1 (
Hi, good morning, Nice to see you. So I'm I'm struck by the drought fires everything else. It sounds so biblical and ancient wondering when you're looking at your capital improvement plans across the sector Jenny and then specifically for the PSU Sofia, is technology catching up to all of these issues are the solutions the capital solutions the capital project solutions the same as more of the same let's just build more of the same or are you seeing technology also catching up to these issues like nutrients and PFAS and so forth and and alternative water sources?
Sophia Skoda (
I guess I'll start by saying we have a a sort of general manager that came in two years ago internal been pay me for 26 years before that. And, I really appreciate this one kind of phrase that he's used often which is if we don't partner with technology and tech companies they'll stop innovating for us. And, so that's part of kind of why we've made this infrastructure investment kind of in a center for infrastructure with UC Berkeley because, we've got a partner right. and we for good reasons water and waste water we're risk averse right. Public health number one environment number one. So we we're right to be risk averse but that it can't stop us from engaging with technology. And, that's you're absolutely right. It's a crucial question. So I think I think that there are some new technologies and we at East Bay mud I know and S F P C as well I think we're really trying to pilot and try a lot of new things. And it's interesting. We had a professor from the business school come out to talk to our management team a couple of months ago. he he's written this book the other F word failure and we are so afraid of failure and it's like to innovate you gotta fail. So, we gotta understand where the failure zones are and how do we kind of engage with that understanding that for us to succeed we're gonna have to fail a little so great question.
Margie Backstrom (
And I think that for unless someone else has one yes
Nikolai Sklaroff (
I was just gonna say I can't speak to technology as as much I'm a debt guy, but solutions are pretty varied from increasing dam sizes to capture more of the storms that we're gonna be seeing during the winters and purification. But, I think the bigger challenge and this is again above my pay grade is the political one. I mean even as somebody working with a water agency when I heard my friend Jay talking about 50% of the water supply coming from purified water I think like your kids a lot of us have become water snobs used to pristine water and have to rethink where we get our water from.
Margie Backstrom (
AbsolutelyWell thank you everyone. Thank you to our panelists.