SMWDBoard of DirectorsStrategic Planning SessionJanuary 27, 2018

1

It is a Strategic Planning Session…

• We have adopted goals in place– Develop 30% local water supply by 2030

• Project planning underway– Nominally Recycle 100% of Wastewater by

2019• 59% today

– Develop six months of water storage by 2030• 7% or about 2 weeks

• And prior to pursuing these goals further, we have financial issues to discuss…

2

At the end of the day, we want to…• Walk out with a common

understanding and Board direction for

– Road map on Operating Revenues• Funding and financing of Capital

Replacement Program

– Agreement on potential rate restructuring

– Financing guidelines for current adopted Strategic Plan implementation

hi h b k h i li d d CC C

3

Today’s Discussion

• District’s Current Financial Position

• Current Customer View

• District’s Forecasted Financial Needs

• Rate Structure Considerations

• Reliability Programs

4

District’s Financial Position

• Today’s picture– S&P “AA+” General Obligation Bond ratings– Debt service coverage of 1.7 per Fitch– Over a year of operating cost in reserves– Net revenue available to partially fund ‘PAYGO’ capital

• Drawing down reserves

– ~95% of customers pay bills within 35 days

• Discussing how we achieve our goals as we move forward

5

Current Customer View

6

Community Input—Survey Results

• SMWD conducted customer research in 2011, 2014, 2015, & 2018 • In 2016, focus groups were convened

7

87.7%

82.5% 84.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

2011 2013 2015

Surv

ey R

esul

ts

Percent Community Satisfaction

Community Satisfaction with the Job SMWD is doing

Question not asked in 2017

8

34.2%

26.8%

21.0%

26.4%

2011 2013 2015 2017

Cust

omer

Res

pons

e

Rates Too High Another 42% raised eyebrows

Perception of Rates

9

51.9%

74.3%

SUPPORT BEFORE OUTREACH SUPPORT AFTER OUTREACH

Surv

ey R

esul

tsBenefits of Outreach on Support

for New Rate Structure

10

Most Effective Messaging Points in Gaining Community Support

• Leader in recycling

• Plans to diversify water supplies

• Increased local control and local supplies

• Operational efficiency

• Water use efficiency

11

Customer Outreach Conclusions

• Effective outreach is essential in gaining community support for SMWD programs and rates.

• Results of past surveys have found:– Widespread recognition in the community that SMWD is doing a good job—

satisfied customers– Outreach has a positive impact on gaining support for increased rates and

new rate structure– Since 2011, the percentage of the community concerned about rates has

dropped with an increase since the 2015 rate restructure

12

SMWD:FY 2018 Single-Family Monthly Bills

$31.97

$60.62

$85.67 $29.63

$35.81

$35.81

$-

$20

$40

$60

$80

$100

$120

$140

Low Usage (4 ccf) Average Usage (16 ccf) High Usage (25 ccf) *

Water Wastewater

* High Usage assumes 5 ccf in Tier 3 13

South County Rate Comparison:FY 2018 Average Monthly Bill

$65 $71

$92 $96 $103 $107

$113

$149

$-

$20

$40

$60

$80

$100

$120

$140

$160

IRWD MNWD ETWD SMWD TCWD SC SJC SCWD

14

Controlling costs = limited rate increases• Baker Treatment Plant saves over one million dollars a year in water purchase costs

• Solar Panels and microturbines reduce the energy cost and pay for themselves in under 8 years

• Optimized power rates for annual savings

• Automated distribution of water and reduced labor costs

• Managing overtime with remote operation of facilities

• TERP helps manage staffing

• Enhanced cell tower leases for additional income

• Employees cross-trained for additional in-house support

• Implementation of CMMS and asset management in GIS

15

District has developed localized solutions to control costs

BLENDED WATER EXPENDITURES

$21,170

BAKER SAVINGS$1,167

$0

$5,000

$10,000

$15,000

$20,000

$25,000

COST SAVINGS FROMBAKER WATER TREATMENT PLANT

CALENDAR 2017($000's omitted)

TOTAL BLENDED WATER RECEIVED BAKER SAVINGS

COSTSAVINGS

5.2%$0.09/ccf

Baker averages $150/AF less than MWD treated water rates

16

Efficient employee ratio

Wat

er D

istrib

utio

n

Wat

er T

reat

men

t

RW D

istrib

utio

n

WW

Tre

atm

ent

Filled Positions

Service Connections

Agency WaterRecycled

Water Total RatioWestern Municipal Water District X X X 142 24996 90 25,086 177La Habra Heights County Water District X 10 1990 0 1,990 199Laguna Beach County Water District X 40 8,800 0 8,800 220Irvine Ranch Water District X X X X 353 104,891 5,272 110,163 312Yorba Linda Water District X 79 25,019 0 25,019 317Santa Margarita Water District X X X X 143 54,494 1,575 56,069 392Moulton Niguel Water District X X 136 54,075 1,321 55,396 407

17

District investments mitigate cost increasesSAVINGS ON

COST SAVINGS PROGRAMS MONTHLY BILLBaker WTP Savings $1.33Power Cost Savings $0.97Labor Cost Savings $1.53

TOTAL COST SAVINGS $3.84

18

Reinvesting in Our Infrastructure Proactive Maintenance and Replacement Saves Money

• Significant Capital Replacement Program, long-term $14.7 million per year

– Reduces risk of failure and emergencies

• Tracking with Computerized Maintenance Management System and Asset Management System

• Implementing TERP

• Automation

19

Forecast Financial Needs

20

What are the considerations for the forecast?

What are our cost drivers and how will they change?

How will the District mitigate cost increases?

How much potable and recycled water will be consumed?

What is the impact of subsidizing water rates?

21

Financial Planning Considerations

Capital Project &

Timing

Funding Options

Forecast Needs

District faces ongoing financial

risks from cost inflation, water

demands changes, and funding availability

22

Paygo

GO Bonds

Revenue Bonds

Expenditures

Revenues

Reserve Levels

CRP

Reliability/Resources

Financial Forecast with Adopted Rates

District costs will continue to rise due

to basic cost inflation and water supply purchases

23

NET OPERATING COSTS

CAPITAL REPAIRS/REPLACEMENT

TOTAL OPERATING REVENUE

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

FY 2018 - FY 2037(in $1000's)

OPERATING COSTS CAPITAL REPAIRS & REPLACEMENT OPERATING REVENUES

Financial Forecast with Adopted Rates& 1% Tax Revenues

District costs will continue to rise due

to basic cost inflation and water supply purchases

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TOTAL REVENUE W/ 1% Taxes

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

FY 2018 - FY 2037(in $1000's)

OPERATING COSTS CAPITAL REPAIRS & REPLACEMENT OPERATING REVENUES 1% TAX AND OTHER REVENUES

Baseline Financials:FY 2018 Financial Outlook

FY 2018 REVENUES AND EXPENDITURES(IN 000'S)

Water Revenue $40,696Water Expense (45,421)

NET OPERATING INC - POTABLE WATER (4,725)Recycled Revenue 9,410Recycled Expense (5,681)

NET OPERATING INC - RECYCLED WATER 3,729Wastewater Revenue 21,273Wastewater Expense (18,456)

NET OPERATING INC - WASTEWATER 2,817NET OPERATING INC - TOTAL 1,821

Property Tax Receipts - General 1% 7,495Rental Income 1,127Other Non-Operating 469Debt Service Activity - Net (1,726)

CASH AVAILABLE FOR CAPEX 9,185

CRP Expense - Net 12,677NET REDUCTION IN RESERVES ($3,492)

District forecasts using reserves to fund CRP projects

Potable Water rates do not support operational

expenditures

25

Cost Drivers

26

WaterPurchases

37%

Power Costs9%

Labor Costs30%

All Other Costs24%

3/4th of the Districts costs result from 3

basic cost components –

Water; Labor; and Power

MET Tiered Rate:Historic Price Growth

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018TIER 1 - METTREATED/AF $408 $418 $443 $453 $478 $508 $579 $701 $701 $744 $794 $847 $890 $923 $979 $1,015

COMPOUNDED ANNUALRATE INCREASE

6.3%

$0

$200

$400

$600

$800

$1,000

$1,200

$ RA

TE P

ER A

F

Ten-Year CompoundedIncrease of 7.2%

MET Forecasts Annual Increase of

4.5% During 10-year Forecast

27

Future Water Purchases

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030TIER 1 - MET TREATED/AF $847 $890 $923 $979 $1,015 $1,061 $1,108 $1,158 $1,210 $1,265 $1,322 $1,381 $1,443 $1,508 $1,576 $1,647 $1,721

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

$ R

ATE

PER

AF

MET Forecasts 4.5% Annual Increase

$1,700+ per AF by

2030

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Financial Requirements:Bond Coverage & Reserves Options

RecommendedReduced Financial

PositionLonger Term Financial

Downgrade

Days Cash on Hand 365 Day Target 270 Day Target 180 Day Target

Bond Coverage Factor 1.50x Coverage minimum 1.75x Coverage minimum 1.25x Coverage

Cost of Borrowing AA – AA+ AA A

Financial FlexibilityAllows District to react to

sudden changes in condition

Reduces District’s ability to react

Could trigger immediate rate increases due to

changes in revenues or expenditures

29

Rate Structure Considerations

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Key Benefits of Current Rate Structure

• Legal Compliance – Complies with Proposition 218 requirements

• Revenue Stability – Fixed charge revenues align fixed expenditures

• Conservation Messaging – Budget-based tiered rate structure provides price incentive to use water efficiently

31

Historic Average Single Family Bill

$-

$20

$40

$60

$80

$100

$120

2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 2018-2019

Water Wastewater

Last Prop 218 Process

* Based on 16 ccf 32

Rate Structure Modifications

• District’s rate structure provides financial stability in face of changing demands

• However…the District has identified some structural issues

33

– Domestic Water Tier 1 and 2 Subsidy– Reduction of Tier 3, 4, and 5 Usage– Wastewater Discharge Units– Basis for Allocating Costs Between Service Lines– Domestic Irrigation & Recycled Water Rates– Water and Recycled Water Fixed Charges

Peak Demand

Base Demand

Syste

m C

apac

ity

January December

Tier 4

Tier 3

Tier 2

Tier 1

Tier 5

District Budget Rate Structure

$

$

Peak Based Pricing Tiers 3, 4, & 5

Tiers 1 & 2 Subsidy

34

Upper Tier Revenue has not materialized Annual revenue deficit of $1.2 million

District’s Rate Study assumed that

District would sell 1.7 million ccf

(3,900 AF) in Tiers 3, 4, & 5

District currently sells 1.3 million ccf

(2,750 AF) in the upper tiers

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

IRRIGATION DOMESTIC RESIDENTIAL SINGLE FAMILY RESIDENTIAL MULTI FAMILY

TIER1 TIER2 TIER3 TIER4 TIER5

35

Potable Water Commodity Subsidy

• District sells water below the cost to purchase it– Tier 1 – 53¢ subsidy– Tier 2 – 26¢ subsidy– Commercial – 48¢ subsidy

• Total rate study subsidy was $4.3 million per year– 1% property taxes– Rental income

Benefits for eliminating include clearly identifying cost of water supply,

highlights benefit of recycled water in comparison, and eliminates cross

subsidy.

36

Elimination of water subsidy corrects revenue deficits and provides capacity for CRP

37

2018 2019 2020

Eliminating the rate subsidy will

communicate true cost of water to

customers

Eliminating Rate Subsidy Partially Funds RevenueNeeds in FY 2019 & 2020 ($ in 1,000’s)

38

$65,000

$70,000

$75,000

$80,000

$85,000

FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023

Current Rate Revenues Elimination of Rate Subsidy

Capital Replacement Program

39

Capital Project Drivers

Regulatory Requirements

Costs Savings

Supply Certainty

Environmental Protection

System Reliability

Innovation

District continues to invest in its system

to achieve the a range of objectives

40

Capital Improvement Plan Funding

• Repairs & Replacements– Maintain system assets to keep in good working condition– Correct identified system deficiencies

• Reliability and Regional Projects– Meet future water supply requirements

• New Development/Expansion– Provide treatment and conveyance capacity to serve growth

PayGo Funding

Revenue Bonds

GO Bonds

CFDs & Developer Fees

41

$0

$50,000

$100,000

$150,000

$200,000

$250,000

FY 2018 - FY 2037(in $1000's)

OPERATING COSTS CAPITAL REPAIRS & REPLACEMENT OPERATING REVENUES 1% TAX AND OTHER REVENUES

Funding the District’s Operation, Reserves & CRP:10% annual rate increase for 3 years

Cash funding CRP requires 10% annual increases and short-

term draw on reserves

42

10% Annual Increases

3% Annual Increases

PayGo Strategy requires near-term draw onreserves

Cash funding CRP requires 10% annual increases and short-

term draw on reserves

43

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

FY 2018 - FY 2037(in $1000's)

Total Reserves Reserve Target Reserve Minimum

Funding the District’s Operation, Reserves & CRP:5% annual rate increase; $60 million bond

Issuing bond to fund CRP will mitigate

near-term impacts on customer rates

44

$0

$50,000

$100,000

$150,000

$200,000

$250,000

FY 2018 - FY 2037(in $1000's)

OPERATING COSTS CAPITAL REPAIRS & REPLACEMENT OPERATING REVENUES 1% TAX AND OTHER REVENUES

5% Annual Increases

3% Annual Increases

Strategic Plan Reliability Projects

45

Strategic Goals

• 30% of water supply from local sources and up to 50% supply from other than MWD by 2030

– Using an ultimate demand of 24,700 AF, 30% to 50% of demand equates to 7,400 AF and 12,350 AF , respectively

– Using the previous demand, the 30% local supply would be 8,250 AF

• Nominally 100% recycling of wastewater generated in the District by 2019

• Six-months supply of water in storage by 2030

• Goals are still valid based on analysis

46

Comparison of 30% goal to Indoor Demands

Ultimate Population: 195,000 AF/Day AF/60 days

Baseloaded

projects AF/Year CFS

GPCD 55 33 1,975 12,000 16.6 GPCD 35 21 1,257 7,650 10.6

Current Population: 165,000 AF/Day AF/60 days AF/Year CFS

GPCD 55 28 1,671 10,160 14.0 GPCD 35 18 1,063 6,470 8.9 47

Existing System Reliability (31 days)Facility AFDistribution Storage Tanks (50%full) 169R-6 Reservoir 407Upper Chiquita Reservoir 295

Baker Treatment Plant (13 cfs for10 days) 258 IRWD interconnection (7.5 cfs ofOCWD groundwater for up to 30days) 149Total 1,278

Two-weeks of storage

48

2017• Wastewater produced by Sewershed• Recycled Water produced by facility• Indicates the following current actual and

potential Recycled Water Availability

FacilityWastewater

(mgd)

Recycled Water Produced

(afy)% Recycled

Los Alisos WRP 0.65 25 3.4%

Oso Creek WRP 1.70 1,730 90.6%

3A WRP 0.22 210 85.7%

Chiquita WRP 6.02 4,410 65.4%

Latham WTF 1.62 0 0.0%

10.21 6,375 55.6%

Available 3,950 49

ProgramWater Type

Volume (afy)

Capital CostTotal Cost of Water

($/af)

Recycled Water Expansion via 3A WRP RW 2,250 $38,092,000 $1,108

Divert Flows from Talega to San Clemente

RW 2,700 $1,189,000 $607

Water Reliability, Local Groundwater in Lower San Juan Basin PW 560 $18,400,000 $2,032

Water Reliability, Raw Water Supply to the Baker Treatment Plant PW 500 $600,000 $1,600

Water Reliability, Treatment of Groundwater in the Upper San Juan Basin PW 2,250 $10,000,000 $898

Water Reliability, Potable Reuse PW 2,500 $25,000,000 $1,533

Water Reliability, Ocean Desalination PW 2,000 $0 $2,167

Water Reliability ProgramProjected Cost of Water

50

Water Reliability ProgramProjected Impacts on Rates and Taxes

51