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
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
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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
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
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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
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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
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– 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 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
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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
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$0
$50,000
$100,000
$150,000
$200,000
$250,000
FY 2018 - FY 2037(in $1000's)
OPERATING COSTS CAPITAL REPAIRS & REPLACEMENT OPERATING REVENUES 1% TAX AND OTHER REVENUES
5% Annual Increases
3% Annual Increases
Strategic Goals
• 30% of water supply from local sources and up to 50% supply from other than MWD by 2030
– Using an ultimate demand of 24,700 AF, 30% to 50% of demand equates to 7,400 AF and 12,350 AF , respectively
– Using the previous demand, the 30% local supply would be 8,250 AF
• Nominally 100% recycling of wastewater generated in the District by 2019
• Six-months supply of water in storage by 2030
• Goals are still valid based on analysis
46
Comparison of 30% goal to Indoor Demands
Ultimate Population: 195,000 AF/Day AF/60 days
Baseloaded
projects AF/Year CFS
GPCD 55 33 1,975 12,000 16.6 GPCD 35 21 1,257 7,650 10.6
Current Population: 165,000 AF/Day AF/60 days AF/Year CFS
GPCD 55 28 1,671 10,160 14.0 GPCD 35 18 1,063 6,470 8.9 47
Existing System Reliability (31 days)Facility AFDistribution Storage Tanks (50%full) 169R-6 Reservoir 407Upper Chiquita Reservoir 295
Baker Treatment Plant (13 cfs for10 days) 258 IRWD interconnection (7.5 cfs ofOCWD groundwater for up to 30days) 149Total 1,278
Two-weeks of storage
48
2017• Wastewater produced by Sewershed• Recycled Water produced by facility• Indicates the following current actual and
potential Recycled Water Availability
FacilityWastewater
(mgd)
Recycled Water Produced
(afy)% Recycled
Los Alisos WRP 0.65 25 3.4%
Oso Creek WRP 1.70 1,730 90.6%
3A WRP 0.22 210 85.7%
Chiquita WRP 6.02 4,410 65.4%
Latham WTF 1.62 0 0.0%
10.21 6,375 55.6%
Available 3,950 49
ProgramWater Type
Volume (afy)
Capital CostTotal Cost of Water
($/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
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