Long Term Financial Planning and Budget Forecasting

Long Term Financial Planningand Budget Forecasting

Jay Bernas, P.E.Chief Financial Officer

2

Agenda

• Background

• Current Challenges

• Building the Financial Forecast

• Beneficial uses of the Financial Model

HRSD

3

HRSD Overview

4

• Provides wastewater treatment for 18 cities and counties (249 mgdtreatment capacity)

• Serves 1.7 million people (20% of all Virginians)

• Independent political subdivision with rate setting authority

• Governor appointed Commission

5

HRSD by the Numbers

• Accounts 470,000

• FY19 Revenues $310M

• FY19 Opex $160M

• FY19 Capex $134M

• 20 yr CIP $5.2B

• FY19 Rate per CCF $5.37

• FY19 Rate per k-gals $7.18

Current Challenges

HRSD costs are rising to treat water to higher standards.

Treated water currently discharged to area waterways –no beneficial use.

Current state of wastewater in Hampton Roads

• Water recycling project

• Regulatory stability

• Benefits

– Reduce nutrient discharges to the Bay (90% reduction)

– Provide a sustainable supply of groundwater

– Reduce the rate of land subsidence (sea-level rise)

– Protect the groundwater from saltwater contamination

Sustainable Water Initiative For Tomorrow

8

Advanced

Water

Treatment

9

Research and Demonstration Facility

• Replenishing the aquifer with 1 million gallons per day

EPA Consent Decree for SSOs

10

• Started in 2007

• Sanitary Sewer Overflows (SSOs)

• Regional Wet Weather Management Plan (RWWMP) submitted 2017 as an Integrated Plan

• $1.8B for wet weather

• $1.0B for SWIFT

11

Adaptive Management Integrated Plan

SWIFT (~$1B)

Plan

Approval

20192030 TBD

Final Measures Plan

($ TBD)

Pathogen Tracking Program

($10M)

2028

High Priority Wet Weather Projects

(~$200 M)

Program Update

Optimization Assessment

Sequence Places the Greatest Water Quality Benefits First

100

105

110

115

120

125

130

1.50

1.55

1.60

1.65

1.70

1.75

1.80

2009 2010 2011 2012 2013 2014 2015 2016 2017

Flo

w, M

GD

Po

pu

lati

on

Mill

ion

s

Water Consumption and Population Growth

Population Water Consumption

Billed Water Consumption Declining – Flattening?

Population

Water Consumption

Building the Financial Forecast

(Not a Community Affordability Model)

Building Blocks of the Financial Forecast

14

Revenues- Water Consumption- Wastewater Rates

Expenses- Operating Budget- Capital Improvement Program

(CIP)

Revenues

Wastewater Treatment

Charges95.7%

Miscellaneous0.5%

Wastewater Facility Charges2.0%

Investment Earnings0.8%

Build America Bond Subsidy0.8%

Other0.3%

Revenues = Water Consumption * Wastewater Rate

Estimating Water Consumption – Assume 1% YOY decline

16

Projected Rate Increases

$5

.37

$

5.8

6

$6

.39

$

6.9

7

$7

.60

$

8.1

3

$8

.70

$

9.3

1

$9

.96

$

10

.56

$

11

.19

$

11

.86

$

12

.57

$

13

.32

$

14

.12

$

14

.97

$

15

.87

$

16

.82

$

17

.83

$

18

.45

9.1

%9

.1%

9.0

%9

.1%

9.0

%7

.0%

7.0

%7

.0%

7.0

%6

.0%

6.0

%6

.0%

6.0

%6

.0%

6.0

%6

.0%

6.0

%6

.0%

6.0

%3

.5%

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$202

01

9

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

20

31

20

32

20

33

20

34

20

35

20

36

20

37

20

38

Co

st p

er

ccf

Projected Wastewater Rate

• High-level budget items

• Include new facilities

– SWIFT O&M

Expenses

CAFR Trend Analysis – Line Item Inflation Rates

19

• 10-year Capital Improvement Program (CIP)

• Integrated Plan (SWIFT and Wet Weather)

• Asset Management (FUTURE)

Capex Projection

20

$0

$50

$100

$150

$200

$250

$300

$350

$400

201

9

202

0

202

1

202

2

202

3

202

4

202

5

202

6

202

7

202

8

202

9

203

0

203

1

203

2

203

3

2034

203

5

2036

203

7

2038

An

nu

al

Cap

ex,

$M

– How much income will you generate to pay Debt Service (principal + interest)?

– Will bond investors get paid back?

– Higher is better

Key Ratios

21

Target = 2.0x

Policy = 1.4x

REVENUES - EXPENSESPrincipal + Interest

Debt ServiceCoverage Ratio

=

Liquidity (Days Cash on Hand)

22

• Liquidity indicates financial flexibility to pay near-term obligations and margin of safety

• Days Cash on Hand (DCOH)

• How many days can you operate with available cash if no revenue is coming in?

DCOH =Unrestricted Cash and Investments

Operating Cost per Day

HRSD POLICY

Min = 270 DCOH

Max = 365 DCOH

• Calculate Net Revenues– Revenues assume a 1% decline in water

consumption until 40 gal per capita per day

• Model Calculates Cash Distribution1. Year 1 Debt Service

2. 365 Days Cash on Hand (high-end of policy)

3. Risk Management Reserve (Self-insured)

4. Cash for CIP (PAYGO)

5. Remaining requires DEBT

6. Year 2 Debt Service, etc.

Model Calculations

23

Plan of Finance

24

Clean Water Loan

WIFIA

New Revenue Bond

Co

st

of

Ca

pit

al

Interest rate will be equal or greater to the US Treasury rate of a similar maturity

Rate subsidy depends on the term

Most recent fixed rate of 3.6% + $1M Cost of Issuance

• HRSD’s Plan of Finance– Use interim financing (Line of Credit – LOC)

– Take out LOC with new money (Revenue Bonds)

– Use Clean Water loans when possible

• Driven by Annual CapEx– Need financing beyond PAYGO

• Model Issues Debt– Calculates debt service schedule and cost of issuance

for each new issue

Debt Engine

25$0

$200

$400

20192020202120222023202420252026202720282029203020312032203320342035203620372038

An

nu

al

Re

ve

nu

e B

on

d

Iss

ua

nc

e, $M

New Money Debt Issuance

PFM’s Future Perfect Model Pro Forma

Total Debt Service Coverage Forecast

27

2.2

9

2.4

0

2.7

8

2.8

6

2.7

0

2.8

9

2.3

1

2.5

4

2.1

6

2.3

5

1.8

6

2.1

6

1.9

6

2.0

2

2.1

3

2.1

9

2.1

1

2.0

7

2.0

6

2.0

5

Total Debt Service POLICY

Total Debt Service (GAAP) TARGET

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.52

01

9

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

20

31

20

32

20

33

20

34

20

35

20

36

20

37

20

38To

tal D

eb

t Se

rvic

e C

ove

rage

Rat

io (

GA

AP

)

Total Debt Service Coverage (GAAP) Total Debt Service POLICY Total Debt Service (GAAP) TARGET

Financial Forecast Metrics compared to 2018 Fitch Medians

28

20-yr forecast averageWhen all SWIFT plants are online 2031-2038

20-yr forecast average

20-yr forecast average

• We underspend the CIP 10% annually for the next 20 years?

– Year 2038 DSCR = 3.11x vs 2.05x

• Water consumption is flat for the next 20 years?

– Year 2038 DSCR = 4.61x vs 2.05x

– Additional $1.3 billion in revenue

• What if inflation is higher (4.3% vs 3.8%)?

– Year 2038 DSCR = 1.62x vs 2.05x

Scenarios

29

• Consent Decree negotiations/deadlines

• Capital Planning – how much can we afford?

• Budgeting – Communicating YOY inflation impacts

• Sensitivity of key variables – Scenario Planning and Risk Management

• Confidence in Financial Sustainability

Power of the Financial Model

30

Historical Total Debt Service Coverage Ratio (DSCR)

31

1.40 1.45 1.85 2.000.0

0.5

1.0

1.5

2.0

2.5

2014 2015 2016 2017

Tota

l De

bt

Serv

ice

Co

vera

ge

Aaa

Aa1Aa2Aa3

AAA

AA+AAAA-

AAA

AA+AAAA-

Senior Lien Ratings & Moody’s Upgrade – March 2018

32

33

Questions?

Jay Bernas, P.E.Chief Financial Officer

[email protected]