Special Meeting of the Commission
Overview of the proposed:
FY 2023-24 Operating Budget Midcycle changes
FY 2023-24 Capital Budget
10 Year Capital Plan
10 Year Financial Plan
Dennis Herrera, General Manager
Nancy Hom, CFO and AGM of Business Services
Laura Busch, Budget Director
Erin Corvinova, Director of Financial Planning (Acting) January 30, 2023
1 Agenda
1. Budget process reminders
2. Budget context, challenges, priorities and approach
3. SFPUC Budget and Capital Plan overview
4. Midcycle changes to operating budget and budget
growth drivers
5. Capital budget process and summary
6. 10 Year Financial Plan update
7. Enterprise presentations
1. Water and Hetchy Water
2. Wastewater
3. Power
2 3
Budget Process Overview
• Fixed, two-year budget; midcycle updates typical
Commission adopted FY2022-23, FY2023-24 biennial operating budget, and FY2022-23 capital budget February 2022
Mid-cycle update planning began Spring 2022 with focus on 10- year capital plan and capital budget
December 13, 2022: Budget progress overview with Commission • January 30, 2023: Special meeting (today)
Provide background on capital budgets and 10-year capital plans Meet our charter obligations for public hearing
• February 14, 2023: Regular meeting to adopt:
Midcycle changes to FY2023-24 operating budget
FY 2023-24 Capital Budget
10-Year Capital Plan (will include written report)
10-Year Financial Plan
Budget Development Challenges
• Ongoing drought
• Economic uncertainty, potential recession
• Inflation, cost increases for operating and capital budgets.
Challenging bid environment for construction
• Rate study for Water and Wastewater happening now,
increased scrutiny on rate trajectory
• Capital deliverability, past underspending of capital budgets
• Volatile power market
• Regulatory risks in Wastewater
4 Budget Approach
Operating Budget
• Mid-cycle of fixed biennial budget, keeping changes to a minimum
• Updating revenue and power purchase projections
• Debt service savings
• Budget neutral technical changes
• Mission-critical additions only
Capital Budget/Plan
• Prior capital plan was partially unfunded, with a one-year FY 2022-23 Capital Budget adopted
• This year’s goal: develop balanced FY 2023-24
capital budget and balanced 10-Year Capital Plan
meeting agency’s needs, informed by deliverability and
ratepayer affordability factors
5 Budget Overview
6 1,652
1,775
FY 2023-24
Capital Uses
32%
Purchase of
Power
25%
Labor
15%
Non Labor
9%
Services of
SFPUC
Bureaus
7%
Services of other
Departments
5%
Programmatic Projects
3% General Reserve Contribition
4%
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
FY 2019-20 FY 2020-21 FY 2021-22 FY 2022-23 FY 2023-24
Capital Uses Purchase of Power
Labor Non Labor
Services of SFPUC Bureaus Services of other Departments Programmatic Projects General Reserve Contribition
1,4311,412 1,504
$ Millions
Budget Overview
77 859
587
405
53 844 Bureaus
CleanPowerSF
Hetch Hetchy Water
and Power
Wastewater
Water
Water
$670.7 M
38%
Wastewater
$426.2 M
24%
Hetchy Water
and Power
$308.6 M
17%
CleanPowerSF
$369.6 M
21%
$1,775 MillionFTE: 2,748
Capital Plan Overview
8 10-Year Capital Plan: $8.8 Billion
0 200
400
600
800
1,000
1,200
1,400
1,600
1,800
FY 23-24 FY 24-25 FY 25-26 FY 26-27 FY 27-28 FY 28-29 FY 29-30 FY 30-31 FY 31-32 FY 32-33 Water Wastewater Hetchy Water Hetchy Power CleanPowerSF $ Millions
Midcycle Operating Budget Changes
List of major changes from original FY 2023-24 budget
9 $
Sources
Updated revenue projection 78,942,358
Change in use of fund balance 5,218,252
Total 84,160,610
Uses
Increases in power purchase costs 117,893,510
Debt Service savings (27,663,422)
Savings in Revenue Funded Capital (14,247,884)
Recycled Water Plant 1,750,000
Workorder changes 1,511,365
Other changes 607,150
Change in General Reserve contribution 4,959,891
Total 84,160,610
Key Operating Budget Growth Drivers
10 Drivers of budget growth
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
FY 2019-20 FY 2020-21 FY 2021-22 FY 2022-23 FY 2023-24
Capital Uses Purchase of Power
Labor Non Labor
Services of SFPUC Bureaus Services of other Departments Programmatic Projects General Reserve Contribition
• Capital uses now take up around
30 cents of every SFPUC revenue
dollar and are projected to rise to
50 cents over the next 10 years,
driven by Wastewater
• By enterprise:
• Power Purchase expenses are the
second major cost driver, which
also puts growing pressure on
Power’s budget
% Capital
FY23-24
% Capital
FY 32-33
Water
48% 51%
Wastewater 54% 66%
HHWP 3% 18%
$ Millions
Capital Plan
What is the 10-Year Capital Plan?
• Long range forecast of capital investment, updated
annually as required by Charter
• Plan comprised of high-level project categories and
projects
• Individual project data sheets with scope, schedule
and cost
• Typically includes a 2-Year capital budget, this year it’s a 1-year budget
• Will include a written report this year
11 Capital Priorities
• Affordability focus for ratepayers
• Over the past ten years, Water and Wastewater rates have increased by over 75%
• Forthcoming financial plans project annual Wastewater rate increases of >9%, and increase in combined Water/Wastewater bill of 90% over next 10 years
• Capital represents largest, and growing share of Water and Wastewater operating costs
• Growing power purchase costs puts further pressure on Power’s budget • Uncertainty about future regulatory demands which may significantly impact Wastewater’s budget
• Rightsizing for Project deliverability
• Historic mismatch between budgets and actual spending has led to large, growing unspent balances carrying forward each year
• Not addressing this creates multiple financial risks for the agency 12 Balancing the Plan
• $8.8 Billion, balanced capital plan, 11% reduction from $9.9 Billion last year • Represents the many hard choices we made as an agency to constrain capital spending:
• Carefully reviewing construction schedules and adjusting for realistic deliverability • Planning for use of unspent prior appropriations before requesting new funds • Reducing costs in the out years to offset cost increases and investment needs in near term
• Diligent project prioritization process, including risk assessment • Taking into account regulatory risks that may necessitate major additional unforeseen costs
• We have made great strides in this cycle, ongoing multi year project to improve capital planning and delivery 13
$million Last Year: Uses This Year: Uses Difference
Water 2,127.9 2,263.9 136.0
Wastewater 6,127.0 4,879.3 (1,247.6)
Hetchy-Water 974.4 976.9 2.5
Hetchy-Power 611.0 595.5 (15.5)
CleanPowerSF 64.5 73.0 8.5
Total 9,905.0 8,788.7 (1,116.2)
Proposed 10-Year Capital Plan
14 $million FY 23-24 FY 24-25 FY 25-26 FY 26-27 FY 27-28 FY 28-29 FY 29-30 FY 30-31 FY 31-32 FY 32-33 Total Uses
Water 290.0 437.3 443.7 337.4 245.4 118.2 85.3 83.7 80.4 142.6 2,263.9 Wastewater 985.5 894.5 818.4 521.1 353.6 280.5 232.6 214.7 253.2 325.2 4,879.4 Hetchy Water 85.9 155.6 152.6 141.6 94.6 99.6 100.0 57.5 47.4 42.3 976.9 Hetchy Power 21.5 77.7 92.7 89.1 81.5 55.0 48.8 46.1 43.1 40.0 595.5 Clean
PowerSF 1.6 2.9 3.0 3.0 3.1 3.3 8.9 18.1 26.3 2.8 73.0
Total Uses 1,384.5 1,568.1 1,510.3 1,092.2 778.2 556.5 475.6 420.2 450.3 552.9 8,788.7 Sources
Revenue
Funded* 154.3 217.7 230.5 222.1 216.3 234.6 241.2 237.5 256.4 225.1 2,235.6 Debt Funded 1,230.2 1,350.4 1,279.8 870.1 561.9 322.0 234.4 182.7 193.9 327.7 6,553.1 Total Sources 1,384.5 1,568.1 1,510.3 1,092.2 778.2 556.5 475.6 420.2 450.3 552.9 8,788.7 *25% revenue funding
FY 2023-24 Capital Budget
15 $million FY 23-24
Capital Budget
Water 290.0
Wastewater 985.5
Hetchy-Water 85.9
Hetchy-Local
Power 21.5
CleanPowerSF 1.6
Total 1,384.5
Water
21%
Wastewater
71%
Hetchy
Water
6%
Hetchy Power
2%
CleanPowerSF
0%
Future Capital Spending
16 Forward looking chart showing prior unspent appropriations, 10 Year Plan and post FY 33 amounts
2,043
3,217
7,708
Capital Plan Commits SFPUC to
Significant Debt Increase
• Current debt outstanding*: approx. $7.4B Bonds, Notes and Commercial Paper and an additional $2.0B in executed Federal and State Loans
• Anticipated additional debt issuance by FY 2033: projected $6.3B in the financial plan • By FY 2033, half of the total operating budget will be covering capital costs, and two thirds in Wastewater
• Increasing interest rates drive borrowing costs up. 30-year debt terms mean our decisions impact ratepayers decades into the future
Capital vs operating uses for Wastewater, Water and Hetch Hetchy Water and Power (Excludes CleanPowerSF):
17*As of Oct.1, 2022
-
500
1,000
1,500
2,000
2,500
FYE 2024 FYE 2025 FYE 2026 FYE 2027 FYE 2028 FYE 2029 FYE 2030 FYE 2031 FYE 2032 FYE 2033 Operating Uses Capital Uses
10 Year Financial Plan
• 10 Year Financial Plan
• Charter requires annual update
• Forecasts operating and capital expenses, rates increases and revenues, and confirms compliance with financial policies • Strategic tool for planning intersection of rates, capital and operating budgets, and capital financing
• How the budget flows into the 10 Year Plans
• FY 23-24 operating budgets + execution factor, then projected to the future using growth rates
• Revenue-funded capital funding needed in year of appropriation • Debt-funded capital modelled based on when cash spending is needed, use of commercial paper for interim financing, and then issuing bonds – usually a delay
18 Sales Volume Assumptions
• Water and wastewater recovering from drought,
COVID, then returning to long-term trends
• COVID recovery to “new normal” slightly below pre-COVID usage by FY 2023-24
• Drought declaration ends in FY 2023-24, recovery over two years by FY 2025-26
• Hetch Hetchy Power forecasting significant new
customer growth
• 4% annual increase over ten years
• Incorporated significant conservatism – 10% cut to new volumes, 12-month delay, no new projects assumed in FY 2023-24
• Minimal volume change in CleanPowerSF
19 Sales Volume Assumptions: Water
20 Sales Volume Assumptions: Hetch
Hetchy Power
21 Major Cost Drivers in 10 Year Plan
• Capital plans are sizeable and rising interest
rates increase capital plan costs
• Higher interest rates increase debt service costs
• Now assuming 5% interest rate throughout plan
• Wastewater debt service growth particularly challenging • Power purchase costs hitting record highs
• Increased budgets and added larger budget contingencies in both Hetch Hetchy Power and CleanPowerSF to acknowledge
uncertainty
22 Forecasted Rates
Enterprise FY 2023-24 Rate
Increase
10-Year Average
Retail Rate Increase
Water - Retail 5.0% 4.2%
Water - Wholesale 11.6% 2.7%
Wastewater 9.0% 8.4%
Hetch Hetchy Power 14.0% 6.0%
CleanPowerSF Generation 15.0% 1.1%
23 CleanPowerSF rate increase is only the generation portion of the bill; the FY 2023-24 increase in the total bill, including PG&E delivery charges, is approximately 5% • Hetch Hetchy Power rates were approved in May 2022
• Other FY 2023-24 rates will be brought to the Commission in May • Wholesale water rates updated annually per contract
• Retail water and wastewater rates are being updated as part of the ongoing 2023 rate study
• CleanPowerSF rates are currently being adopted annually to respond to power market price volatility
Affordability: Average Water/WW Bill
24 Appendix
Link to capital plan spreadsheets and project
datasheets
25