CDIAC: Transportation sector

The shifting sales tax revenues expectations, large infrastructure commitments, labor and materials scarcity, and changing asset utilization assumptions present additional tests for the transportation sector. Issuers and market professionals will discuss the distinctive challenges that confront California's transportation sector and the public finance strategies being used to meet the borrowing and credit needs of the sector that keeps our economy moving.

Transcription:

Robert Berry (00:06):

Well there's probably has not been a sector that has experienced a greater whips saw on the demand for services from the onset of the pandemic until now as we emerge than the transportation sector. And at what level will demand settle out to help us explore the challenges and finance approaches in the transportation sector. We have a great panel this morning. First we have, Scott Monroe. Scott is Senior Director at Fitch Ratings Global Infrastructure and Project Finance Group where he serves his co-head of the north American transportation team. His team covers airport Seaport toll road and other transportation issuers with a focus on those using demand based and availability payment structures. Joining Scott is Tatiana Starostina, Chief Financial Officer for Los Angeles world airports. Tatiana oversees all financial and accounting functions including all debt financing related functions for both the Los Angeles international airport and the van NUS general aviation airport. Then we also have from LA Metro Tim Mengle and Rodney Johnson. Tim is Deputy Executive Director of the Finance for LA Metro. His team is responsible for funding. The projects and programs included in the agency's 8.8 billion annual budget. Rodney Johnson is Deputy Executive Officer of Finance at LA Metro. Rodney's current role includes all aspects of municipal debt issuance and administration capital project financing and the investment of public funds. Then finally our panel moderator we'd like to welcome Ira Smelkinson. Ira is Managing Director with loop capital markets with a practice focus on transportation finance and a specialization in airport and Seaport finance during his 35 year career. Ira has been involved in over 35 billion of bond financing to develop transportation infrastructure throughout the United States. Great panel today. Thank you all for being here Scott. I believe you're up first with a sector analysis.

Scott Monroe (02:03):

Okay. Yeah. Thank you for the introduction. First let say what a pleasure it is to be here in Los Angeles and this beautiful hotel which is first time I've been here and the Bond Buyer conference. And it's nice to see some familiar and some some friendly faces. So, I'm here to represent the credit rating agency perspective and what's going on in the transportation sector. I'll go over kind of a brief overview of the performance of some of the transportation sub sectors the factors that are driving that performance and I'll get into some of the major drivers. We see driving performance going into the remainder of this year heading into 2023. And if we could get the slides on the board please. Oh there we go. Thank you. So, just from a high level overview of 2022 is has been good to transportation ratings. The vast majority of rating actions have been positive. And when I'm talking about rating actions I mean not just upgrades but also negative outlooks switching the stables stable to positive which is a little ironic because if you look at that list of credit drivers only one of them is clearly positive. The other ones are either negative or at best kind of hazy but it really gets to the to the importance of that COVID recovery. And, it really ought to because if you go back to March and April 2020 the transportation sectors are experiencing dramatic declines in volumes. If you look at airports and claimants were down over 90% if you look at toll roads traffic was down 50 to 60% or if you were managed lane even more it was down about 60 to 75%. So, major major declines. And if you fast forward and look at the more recent performance it's really a much better story. So, airports right now have employments running about 80% toll roads have traffic running about 90% and effect the revenues are even higher. your typical toll road now has revenues of a hundred percent or higher. And, that speed of a combination not only of the traffic recovery but also because a larger proportion of that traffic comes from trucks which are charge higher toll rates. And, it's also because a lot of tr of toll roads have been increasing their rates. So, what this has done is it has really stabilized the sector and allowed for us to move a lot of those negative outlooks back to stable. and we've even been applying some upgrades here and there. So, that's the good news but not all the news is good. And that gets us down to supply chain disruptions you know at the airport yesterday reading a news article. And it mentioned a report from Nomur which is a Japanese bank. And according to them in China there's over 200 million people who are under some form of lockdown. some of those lockdowns very severe and we're talking about the second largest economy on earth the biggest exporter on earth and and a really essential part of the supply chain. So, of course the zero COVID policy that's resulting in all these lockdowns has only made these supply chain disruptions even worse. Now that's the bad news. The good news is the transportation sectors they're really being impacted by these supply chain disruptions are seaports which have done very well through the pandemic and getting that little later on in trucking which is also done well. So, in otherwise pretty positive story for those two sectors we have this negative which really doesn't reach that level of materiality to drag down from a credit perspective. Next we have higher inflation you know last readings running at eight point a half percent 9% before that. And, I think when most of us turn on the news or read the newspapers we hear about inflation it's usually cast in a pretty negative light but from a transportation sector perspective I actually see this as more of a mixed bag. And, there's a few reasons for that. One is if you look at the history of rate increases amongst toll road sea ports et cetera they tend to at least track inflation if not exceeded. And, we have every reason to believe that that's gonna be the case moving forward and if you raise your rates at the same level of inflation you aren't treading water that at least not for most transportation agencies because most transportation agencies are running rather large surplus which means if you have revenues up here and O and M down here and both of them increased by 10% just by the law of mathematics you're talking about a higher amount of cash flow available for debt service which causes debt service coverage ratios to rise and leverage to fall. That's a good thing for financial profile. And finally you know this is very capital intensive industry. Alot of transportation agencies have issued a lot of debt in the past and if you borrowed in 20, 10, 20 $15 guess what? Now you're repaying that debt and depreciated 20, $22. So what it does is it lowers the real debt burden on otherwise indebted transportation agencies. So there there are some positives you don't often hear about but I don't wanna be seen as a Pollyanna. of course not not all transportation agencies gonna benefit particularly those that wait long periods of time to raise rates. Sometimes you see toll rode agencies for in instance only raising rates when they embark on a new very large capital improvement plan much maybe once every 7 to 10 years. There's other instances where there's just a lot of political opposition or even legal impediments particularly for P 3's. So, when it comes to inflations mixed bag we look at how it impacts issuers on a credit by credit basis. and then we have increasing interest rate costs. And there's just not not much to talk about here that's positive except that most transportation agency debt profiles use fixed rate debt. So, they're not likely to see rising costs immediately but it's a capital intensive industry. And, so a lot of transportation agencies go to the debt markets to at least help finance rehabilitation expansions of existing transportation systems. So, clearly that's going to lead to increased debt costs down the road. And as a mitigating factor they may need to look into things like raising rates scaling back the CIP fan or even deferring it in the interest of time I'm gonna skip over the high oil prices in the Ukrainian crisis. I think that's pretty clear but the main takeaway from these credit drivers is we have some positives. We have some negatives but it's really that COVID recovery that is really dominating the other credit drivers and has led to such a stable outcome. I'm just gonna go quickly over the three main transportation sectors that we cover. So, sea ports, airports and toll roads here you have TSA throughput. It gives you a sense of what's going on nationwide. of course there is the major collapse in employments in 2020. And, then through the months and the years you had a pretty stable recovery a narrowing of that gap between the performance in 2019 which is the green line and the rest until you hit about February of March of 2022 and then something happened the gap stopped closing. And, in addition to some of the negative factors that I'd mentioned in the last slide there's some additional factors that are causing that. One is a pilot shortage. We knew there was a pilot shortage coming. You know the industry was well aware of it but what the pandemic did was it sped up the timeline what that would hit. And there's just not the pipeline of pilots coming out of schools to replace them. So, that could really cause a capacity to crunch for some years. There's also bottleneck with TSA that is not finding the staffing. It needs to adequately staff security you're seeing rapidly rising far. And, then international traffic has just not come back to the same degree as domestics. So, that's what's causing a little bit of this stalling out for airports. And then moving on to toll roads you see that kind of that similar severe dip during the worst of the pandemic. You have a sudden recovery about half of those losses recovered by the time you hit June and a steady recovery until the fall of 2021. Well, that's when it gets back to about 90% of traffic levels. And I think toll roads may kind of tread water there for a while. And, and part of the part of the problem is working from home particularly in regions like Silicon valley and the bay area Northern Virginia around Washington DC where you have this concentration of very affluent highly educated workers who are much more likely to work in the type of jobs that can be performed from home unlike more blue collar communities where without those type of occupations have to be done in person. And, we think it may be many years if ever that we really get people back in the downtown areas into their offices. And then, finally ports not a lot to be said here except how well the port sector has performed. There were a few months when TEU cargo was down. but the story otherwise is a strong one. By, the end of the year they were breaking records in those record breaking trends only persisted ever since then and really the reason why ports had done so well in other other transportation sectors. Haven't just because they're in the business of moving goods as opposed to people. And, as people were locked down in their homes of course you know people transportation would suffer but with all the stimulus checks most people felt pretty flush with savings and they used that to buy goods and buy from Amazon and having delivered to their homes. So, it was a boon to seaports unless of course you were a cruise port. So, I think I'm going a little over time. So I'm just gonna quickly run through where we see things heading through the rest of the year and then into 2023. So, what our of age economist are saying is that heading into next year we think that GDP is gonna fall in half to a rate about 1.6% which by historical standards is pretty low but we're not talking recession. That's an important thing. our economists are also telling us that inflation will remain at elevated levels but nonetheless will come down to a much more comfortable 2.6% that interest rates will rise which is causing inflation to fall. Another a hundred basis points. our expectation is that working from home is going to gradually decline which should help out toll roads. We, think the gas prices will remain at elevated levels but come down from the uncomfortably high ones we're facing now. And, we're expecting a to continued expansion in the managed lane space. And when you really take all these kind of positive and negative factors together really supportive of a stable credit rating environment. and that's why we have it at neutral currently. And I could probably go on and on about more factors by know I'm already over time so I'm gonna pass the Baton over.

Tatiana Starostina (12:35):

Great. So I think I will be next and good morning everybody I'm Tatiana starstina I'm chief financial officer Los Angeles world airports or LAU. And of course I'll crown jewel is Los Angeles international airport or lax. So, I will be using LAU and lax interchangeably most likely because that's what we do but I wanted to make sure you know our acronyms we like probably any agency love our acronyms. We have quite quite a lot of them. I'll give another second for my slides to be pulled up. But I do want to say that I'm really excited and I echo both Scott's comments and Niklase comments. It is so good to see everybody actually come together again having gatherings right? Like, this are incredibly important and stimulating these the conversations I think we all missed being face to face. And, I really also am glad that all that skepticism that I encountered with some of the investors who asked me do you think the business traffic is going to be back? And, I said absolutely. That I was I know we're not yet quite a hundred percent back with business traffic but I see that the trend is definitely very optimistic. So, thank you all for coming here. And I'm sure a lot of you who came through through lax. So this picture is very illustrative. There is a lot happening right now. You saw I'm sure a lot of cranes and a lot of construction activity going on. We are in the midst of a transformational capital improvement program changing dramatically changing the public the travel experience through LAX. It's been an incredible journey throughout the pandemic. We initiated this capital improvement program in 2018 obviously did not expect the pandemic to hit but the most miraculous thing is that we did not miss a beat during the pandemic. We were able to stay on track and continue progressing and actually delivering some of the key milestone projects in our 15 billion transformation capital program. So, why we were able to do this how do we move forward? So, how we able to do that? Well we'd like to make a very ambitious but very factual statement. LAX is actually the strongest airport credit in the United States. We are largely so successful because of this base that we're serving. This is the second largest combined statistical area in the United States. And it is important to also note we are the only large hub serving this statistical area. Those of you who came from New York you have three large hubs here in LA. We only have LAX and we love it. And we heated at the same time but hopefully in a few years we will all absolutely Marvel at the world class experience that we are preparing for you. This is the largest origin and destination airport in the country. And prior to the pandemic it was also the largest what we call R and D airport in the world 80 about 85% either live here or come here to stay. So, that gives us a lot of stability and a lot of credit certainty. We are also one of the largest international gateways in the world in the recent counts. We were the third business international gateway in the United States because of that our traffic recovery has been lagging as Scott mentioned international traffic is not yet recovering at the same pace but the good news is that our financial position and our financial recovery has been really really strong. A lot of it is thanks to our airline partners who have been solving thanks to the federal government throughout this crisis in the continuing paying. And the airline revenues actually completely recovered and even in our preliminary 2022 fiscal year numbers being slightly ahead of the pre pandemic levels. the non-A airline revenues are still lagging. Again the passenger traffic is not a hundred percent but our cash position is stronger than pre pandemic of debt service coverage or forecasted to remain really strong. And our cash flow that cash flow position is also is forecasted to exceed in the in about a year to exceed the pre pandemic projections. on top of that we have we're very conservative. We have a very conservative debt portfolio. We are predominantly long term fixed rate debt. And, right now we have about 11 billion after the last debt transaction that we completed in August this year and we have very strong bond security provisions. So, as I said we are now about I would say 60% expended on this 15 billion program that we initiated in 2018. That program starts from redefining how our passengers are going to access LAX with partnering with two P three developers building the airport automated people mover that will allow people to actually connect to the regional transportation once. both connections are completed and also a consolidated rental car facility which will bring all the rental car operators under one roof. And, it will be the largest rental car facility in the world. You can actually already see it. It's massive. It takes about 20 minutes just to go around the block to see it. We are also partnering with airline partners on modernizing their terminal facilities Delta and American and Alaska currently in the process actually I will show you the pictures they're in the process of modernizing their terminals. Those of you who recently traveled on Delta we're able to experience their absolutely gorgeous new ticketing and lounge. Those of you have access to the lounge. They accelerated the programs by 18 months which is actually thanks to the pandemic. They were able to completely close their terminal three. And the the results that we're seeing which are not yet complete the whole program will be completed in 2023 but it is a fabulous addition to our facilities. We're really excited. Last year we actually completed quite a few facilities ourselves. So, Westgate Tom Bradley. Those are the new common news international capable gates that lower delivered and opened up in May 2021. And, it is completely full and very popular with our airline partners and Southwest helped us deliver what we call terminal one and half. And now it's called terminal one. You won't see terminal one and a half on the labels. This is additional ticketing that they delivered on time and below budget also in May 2021. As I said Alaska is also in the middle of a very large modernization program of their facility. So, also by the time they're done they were not able to accelerate because of operational challenges but they will be done before the Olympics which is a very big milestone for us. Their facility is going to be state of the art and gorgeous and Alaska is doing a smaller investment but also very needed and terminal terminal six. So, basically by the time that done all our existing facilities will have been modernized which is really exciting. And then again talking about access this is the schematic of how you will be able to access LAX. You will not have to have that nightmare experience going through the central terminal area and spending about an hour to go from terminal one to terminal seven. You will be able to use the automated people mover and travel from the consolidated rental car facility. I think it well it's going to take less than 10 minutes. So, it's going to be completely different experience. We already opened the economy parking garage which is a state of the art facility which we're very excited about. We opened it in October last year and it just was a it has been a tremendous success. We sold it sold it sold it out a few times especially during the holidays. It is definitely a facility that we are very proud of right now. It's serviced by shuttles but eventually it will also be connecting the terminals with with a train. So, this is existing capital program. It is now fully funded after we completed our most recent bond issues which was labeled as 2022 GH. We added another Sears GHI this bond funded portion of this program is completed. And, as you can see our funding plan has been really robust. So, it's predominantly debt but it's only about 56% for this level of investment. it is a very healthy funding plan. So, we are investing a lot of our own cash into it and we will continue obviously generating hopefully and continue investing into these facilities. But now the big question is what's next right? So at the end of last year 2021 we received environmental approvals for a next big project called airfield internal modernization project. So, that project is comprised of three main components. We will work on the we're actually already started. some of the work on the airfield FAA has been really instrumental in a key partner with us on spearheading some of the improvements that need to happen there both to improve efficiency and also enable some of the terminal developments that we will take on next. And the terminal improvements that we have where in the planning now is in addition to terminal one we'll call it Concourse zero. So, that is going to be an additional corn course that will have all the processing still at terminal one. It's also going to be common use and then terminal nine which is going to be a brand new facility with additional 12 to 18 gates. And, that will be an international capable facility. Well both C zero and T nine will be what we call kind of Greenfield more like of a brownfield but they will be standalone facilities. And, these will complete our terminal complex. There will be actually no more space for us to build out. So, it's really exciting. It's a lot of investment and a lot of focus to get this completed. But once we're done hopefully then we will all just enjoy easy access to the gates with absolutely fabulous concession offering and a lot of technological improvements. We are incorporating all the recent technologies and of course biometrics is a big thing to put on our own. Most of our international all of our international gates. And of course we continue working and rethinking roadway access even with the train. we the third component of this program will be redesigning our roadways to improve access and separate the local traffic from the air or airport traffic from the local streets. So it's also going to be very helpful to further elevate the and hopefully completely bring the congestion to a completely normal level. So, this is how it's going to look. So looking ahead prepare for more construction but our new C I P the one that we just announced as part of our August bond offering we did the first affordability analysis and we are sizing it at another 15 billion. So, that is through 2029. So, basically we are planning to invest in about in the course of about 10, 11 years 30 billion into this facility. And of course now the big challenge is planning this big investment in the world that is changing in the front of us. Right. So, that is what I'm sure IRA will have a lot of questions about how we're going to do this and I will leave all these answers because I have all of this figured out to the Q and a session.

Tim Mengle (25:59):

Thank you, Good morning everyone and welcome to Los Angeles county. If you're not from around here give you a quick quick overview of Metro. if you consider Los Angeles county in terms of states we are the size of Connecticut with a population of Michigan and an economy somewhere between Illinois and Florida depending on on whose numbers you you look at. The vast majority of the people and activity is compressed into the Southern one third of the county about 1500 square miles and most of that is our transit service area but we are unique among us transportation agencies. We're not just an operator. We also serve as a planner a coordinator and a builder of projects transportation projects throughout the county working with municipal operators Caltran regional rail everyone else lava. Our transit system is the third largest in the country. Our ridership has recovered a little over half of what it lost in the depths of the pandemic and is like slowly and steadily crawling back. we'll see if it catches up to the numbers that Scott showed. our primary funding source is voter approved sales taxes. We're also unique in a funding perspective. they provide 2% in perpetuity. We have four half cent local sales tax measures. And, at current collection rates they're providing over $4 billion a year so more than half of our budget. So, that has a significant funding source for it. And I'll let talk about the rest.

Rodney Johnson (27:41):

Yeah good morning everybody. Rodney Johnson I'm just gonna touch on our sales tax briefly. cuz really I think the excitement today is gonna be in the Q and a IRA's got some good stuff for us. these measures evidence the authorities multi-generational support of transportation in Los Angeles county with proposition a in the early 1980s and culminating in the most recent measure in sales tax implementation which passed with over 71% of voter approval during November of 2016 see sales tax securing these bonds proposition C we'll skip that part, next slide As, mentioned on a previous slide heading into fiscal year 2021 the authority faced with potential degradation of sales tax revenues the magnitude and duration of which was a mystery really at the time but, the the short of it is it was all a good news story. After that we had a massive dip. we had a strong commitment from our board and from the CEO to not lay off to not stop tier one projects related to capital investment. And, we kept we kept moving forward with the help of the feds as you would expect. and as Tim mentioned all the ridership has yet to reach pre pandemic levels. It's increased significantly as employees and students have begun to return to in personal instruction because of the agency's prudent financial management and prioritization of major capital project expenses metros footprint never stopped expanding as the agency continued to take steps toward more seamless travel across the region. Progress is continuing to be made on projects like Creon lax that will connect to the expo line to lax. as Tatiana mentioned and the green line the regional connector project will directly connect the golden export lines and reduce transfers. the purple line extension will bring the subway to Los Angeles west side. And the gold line of foot hotel extension will connect the inland empire with downtown Los Angeles and the San Gabriel valley. With that that just a couple of comments. transportation is a it's sort of a hot button issue for a lot of people as it should be. Right. So, if you're a big advocate of transportation you can direct your questions towards me. If you had grievances with transportation I'd suggest directing to Tim and with that we'll pass it over to IRA and move forward with Q and A.

Ira Smelkinson (30:03):

Great well thanks to all the panel members for their very I think insightful comments and bringing us up to date with where things stand. I think one of the advantages or disadvantages depending on your perspective being the last panel is that a lot of the themes and the questions you're gonna have you probably already heard of from the other groups. But I think hopefully we'll be able to get the perspective of the of these transportation professionals here and Tatiana I have to start with you because you you threw me a softball here. you know what we've heard all morning is that the only thing that we're certain of is uncertainty and you're talking about big numbers these projects are expensive you've got some serious milestones down the road that I know you have to hit for for a number of your stakeholders and constituencies. I mean how do you go about planning for something this big given all these uncertainties that are out there what's kind of give us an insight into your thinking you know from a financial standpoint as you try to get your arms around this.

Tatiana Starostina (30:57):

As I said I have it all figured out no I I don't this is absolutely a monumental task to be planning something of this magnitude at the time when we have really no clear understanding how the world is going to evolve we have I think everything that most of us would bet is a highly unlikely event happen in the last three three and a half years which was honestly been the theme of my life. I always joke about it's all about the fat tales and it looks like they happen a lot more often than than we give credit statistical credit to events. But, I think where we start and what makes why are so strong is that we do start with the financial affordability. So, the fact that we came out early on with a number it's a big number of course another 15 billion. And, honestly I hoped it would be a smaller number as the CFO because I kept saying you can't buy you you build one house. Your second house is not going to be the same in this luxurious but it ended up to to be another 15 billion but there's going to be no another 15 billion. That's not what I say. That's my new mantra. But honestly what we have is a full alignment and commitment in the executive team to manage to this number. So, we established what we now consider a cap. And and now the challenge begins because we have a lot more that we want to implement. Of course, the list of projects for transportation agencies is endless. We all have above the line and below the line right? And the and the trick is now what comes up what goes up and what moves down. Nobody wants to move their projects down but we are going to have this done regularly. Obviously we are such a frequent assure that we update our financial plans more than once a year. Now internally we're going to keep also updating our CIP the current CIP was somewhat kind of set. And it had a lot of cushions around it because we did have a lot of capacity. We had the reserve we for risk we had the reserve for escalations. We had the reserve for new projects 15 billion the new 15 billion is everything in. So, just changing the mindset is going to be one of the key priorities so that people understand there's I don't have any more reserves. So, this is this is the number. It will have a reserves in it and does already have a reserve in it. And it's pretty sizeable for obvious reasons. Nobody knows how the inflation is going to go. So, one when we size the projects it's a much smaller number. And then we put a pretty significant reserve around it. We don't yet have project cost. We don't have project cost estimates. It's one of the biggest challenge right now to produce a project cost estimate not knowing how the inflation is going to go right? So another thing is very strong internal governance. So, we already demonstrated through this C I P that our governance works. We were able to ask all the right questions at the right time. The reason why we didn't stop any any projects during the pandemic is not because we were lazy or things were just kind of on going in just because we started no we we asked and we looked at every project. S,o that governance process is very nimble. It's very flexible. We can meet at any time and we ask tough questions to ourselves. So, really being honest with each other and and allowing the finance voice to be heard you know even though we are not very often the most popular people in our organizations it is important to hear this voice right. And I think that is really important going forward to plan for this uncertainty because one thing we know for sure is that we will have to change so we will have to change continuously. That's the approach that we will be taking.

Ira Smelkinson (34:59):

Okay great. I mean it it certainly for Rodney and Tim you've got you kind of commented on the strength that the sales tax revenues provide you in your operation but really hearing about some of the comments from earlier today about changing behaviors changing views about transportation community cetera from a planning standpoint how do you get your arms around that? Not so much from the revenue or the financing side but kind of a from a plan. What do you need looking into the future?

Rodney Johnson (35:26):

Well let's start with the buses. Okay. Metro had committed to a new program called NextGen which is a study of how we deliver bus service to the people in and around Los Angeles. And that effort started long before COVID. So, then COVID comes then things change. we're still continuing that effort recognizing that travel patterns have changed. so we're hoping to keep adjusting because you can adjust with bus bus lines much easier you can with rail lines. But on the on the other side of it with the rail lines the board is gonna continue their long-term focus on making Los Angeles county accessible by rail. As, I mentioned earlier the purple line heading out to the west side my kids are excited about the ability to get on a bus or train in Fullerton and take a couple of trains to get to the paging muse right. To go to the LA county museum things like that that matter. One of the benefits of staying focused on rail capital improvements is transit oriented development. If you've had the chance to be around the what's the city right there Sony studios expo Culver city Culver city thank you. tremendous investment in housing in and around those those stations. And you're likely to see that continue. So, that's that's where metros board is staying committed to those capital improvements and things like NextGen are aboard and and staff effort to keep you know delivery changing as the needs change of our riders.

Tim Mengle (37:07):

Yeah. I think just add a little bit about that. We all deal with change but I think we feel it very acutely in transportation because the transportation environment does change sometimes rapidly. It's been accelerating in recent years and then the pandemic exacerbated that and also introduced a lot of uncertainty. So, right now a lot of transportation is basically one giant pilot project to see you know how things are gonna turn out and you know what the new normal will look like and how public transportation anyway we will fit into that. and so we deal with that as well. It's also a little bit of a challenge for us because our funding does not change as fast and in some cases it doesn't change at all. Once our voters approve a ballot initiative those funding categories and percentages are locked in place. And, So as time goes by and transportation continues to evolve there gets to occasionally be a growing disconnect between what our funding says we can do and what our budget says we will do. And, so from a finance perspective we don't just look for financing to offer us liquidity. Sometimes we kind of look for to offer us a little bit of flexibility too to sort of narrow that gap so that those are also some of the challenges we face.

Ira Smelkinson (38:22):

Great. Thank you. shifting gears a sec Tatiana you mentioned some of the projects that are in the LAVA capital plan you did with private developers. Timmy just mentioned you know transit oriented development obviously been attractive for private development. Scott and O fit this summer issued a piece that the appetite from P three developers may be going down because with inflation it may be harder for them to get their arms around what the costs are. So I guess a question first with Tatiana and then for first with Rodney and Tim I mean how do you see the private sector certainly the airlines you touch upon but kind of what's your thought process for going down to P three route number one and then number two if you do in fact find that the costs end up being overly burdensome for those market participants do you do it yourself? How do you respond?

Tatiana Starostina (39:12):

Right. Great question. So yes. We obviously right now have two very large P three S going on but honestly airports have been using P threes for decades right? We just didn't call them P three's but this is the environment that is most conducive for this kind of partnership. And it will I believe that it will absolutely continue being this way. Now the challenges with P three are the challenges we're experiencing with our in-house projects as well high labor costs inflation uncertainty how do you commit to a number when you don't really know if you can deliver? And I and and another thing is I think that sometimes P three's are looked at as a way to just sort of pass on the risk. Well you really never pass on the risk. You are the owner you always have this risk so this needs to work for both partners. And, I think that that is the key learning and message that this is a kind of partnership that we are not just sort of offloading everything to the developer and and go have some coffee. This is a constant management collaboration. So and it's not always pleasant. We all know there's always some litigation some disagreements contractual terms are absolutely key to help define a lot of responsibilities. But I don't think that all these challenges will stop us from continuing using P three. Actually we we have at least a couple of P threes we're thinking about for the future in which we have not included in our $15 billion program. And, we absolutely will go that route because A as I said we have a cap and we have a lot of projects. So we do need partnership B there are projects that we just do not have the expertise for. So, automated people mover we airports don't build people movers. We are not in the business. Unlike our colleagues we just don't know how to build trains. So, why in-source this kind of technological and expertise if you don't have it you bring the right partner but again bringing the right partner being is the key. So, we are looking at various ways of partnering in one of the big projects that we are contemplating is cargo modernization project that we already went out with the R F I C because we wanted to hear back from the community. So, there's there should be constant dialogue. You need to listen in what they're telling you. What's important to them when they're considering this level of investments. So, the next step for us will be issuing an RFQ and selecting a partner or maybe two partners. We'll see and then go into the project a pre-development agreement. That's something that Fitch mentioned right? Progressive design build pre-development agreements. You probably want to dance a little bit longer before you actually go into the partnership now. Right. and I think that's again the approach that we will be taking now will we be investing our own money? Actually I would never say no. And I not talking about fail projects because the goal is really to set up the partnership that we can work through all the challenges together. Of course if there is a fail there is a fail. As I said that you never really pass on risk with P three's. You are the owner of your property of your assets. So, we absolutely will do what we need to do. But for us the key question is how to actually best deploy our own capital because a lot of our projects are on the long long term are very lucrative investments. We have captive audience on the airport with passengers with airlines. We we all now again being the only large hub here the scale and the size of LAX it is very attractive and it's attractive for us as well. So again finding the right partner maybe taking a little bit longer to figure things out and think about where we can come in and how we can actually deploy our capital in such a way that we can generate returns as well.

Ira Smelkinson (43:28):

Great Tim ,Rod if you have any thoughts on the whole P three topic you wanna chime in

Tim Mengle (43:33):

Actually talk you as far ahead of us in terms of million P threes. So I think she she spoke well for all of us.

Ira Smelkinson (43:39):

Okay, Terrific. I know we just have a couple minutes left but I do wanna at least one more question Tatiana we saw in the most recent transaction LAVA had looked like I think their first four into the green bond world. How do your green bond issuances and thought towards ESG kind of jive with what's happening in the broader city? And to what extent is that kind of collaborative in terms of trying to move the topic further down the field?

Tatiana Starostina (44:06):

Great question. Of course again Nicolias made me feel a little reticent now but I'm very excited about our green bonds. We issued two transactions one for Conrac which is the consolidated rental car facility. And then this recent August transaction also I had two series that were certified as green. We used the second party opinion provider verifiers confirmed that we qualify for this certification. And then they also determine the reporting requirements which we were all very obviously focused on because we don't want to have a lot of administrative burden with reporting but at the same time what's important for our is that we've been on the forefront of sustainability since 1980s before it even became such a you know popular key word for all of us. We, just never really spoke as much about it to some degree all these ESG requirements and now the green bond requirements. They may be a little bit more burdensome but it's it also allows us to actually tell our story because we are already doing all of this all our new facilities that we are building have to be at least lead silver and a lot of them for example the west gates that I mentioned the common use facility international facility that while we built certified as lead gold. So, and that is something that we are very proud of. And, we put sustainability features in all our facilities now working on reclaimed water solar bike access pedestrian access working with the local communities to also make sure that we provide opportunities for apprentices and training so that they can join our transformational capital program. So, this allows us to tell this story better. So, again I think we will be able to use our regular sustainability report which is an annual report our environmental team issues anyway to highlight our green bonds and also put all the requirements for reporting into into that publication. So, I will tell you a year two years later if we regret it but I actually again I am so excited and I'm really glad that there is now this option to have a third party certify you so that we don't end up with green what they call greenwash. When when we say much but don't deliver we've been delivering we just now are catching up and a lot of financing that we've done. Would've qualified for green but we just we were too busy so now we're much more focused.

Ira Smelkinson (46:49):

Great. Well thanks everyone. I've got 12:30. I know we wanna stay on time for our lunch and our keynote speaker. So, why don't we wrap it up thanks to all the panelists for a great presentation today.