- Understanding the difference between labels and credit risk
- What is needed to help market participants integrate ESG most effectively?
- Where are the obstacles and how to address them?
Alma (
All right, we are now moving on to our ESG panel, ESG status update. I'm going to hand it off to Dawn to continue.
Donald Gonzales (
Thank you, Alma. And thank you to the Bond buyer for allowing us to have this, what I'm sure since many of you are here, you're looking for some controversy, so we aim to provide it for you. So hopefully you got a little coffee in you, a little dessert, and we're going to tee this thing up. Good. So we've got a great panel. I'm going to let them introduce themselves in just a second, but maybe you can think about some of the things that were said at lunch and earlier this morning as we go through this. And then you can have some good questions because we've got some good people with all the answers. The good thing is I'm the moderator. I don't have to answer, I just get to ask. So with that, I'm going to turn it over to AdeBola and then we'll go from the herd of Robert. Thank you.
Adebola Kushimo (
I don't know about not getting to answering your question. I may have a few questions for you, so we'll see how that goes. Good afternoon everyone. Thank you so much for having us. Thank you to the Bond Buyer. My name is AdeBola Kushimo. I've been at Moody's for 14 years this month, and I have done all my work in local governments from the Dallas office.
Robert R. Puente (
Good afternoon. My name is Robert Puente. I'm the CEO president of San Antonio Water System. We're a public utility here in right down south in San Antonio, Texas, one of the largest water utilities in the nation. I've been there about 15 years. Prior to that, I had about a 15 year, 18 year experience in the Texas legislature. So don't blame me for what's going on today.
Nicholas Donias (
Hi, my name is Nick Donius. I'm a vice president at SMBC Sumitomo Masui. We're one of the three large mega banks in Japan. I work in the infrastructure finance group and so our involvement within the muni world is that we're an underwriter for municipal bonds. We also provide letters of credit for variable rate demand bonds and supporting state and local governments. And most of my time is spent on the project finance side where we help finance direct loans for public-private partnerships.
Ted Chapman (
Hey all my name's Ted Chapman. I'm with Hilltop Securities. I've been there about, oh whopping 18, 19 months. Prior to that I was at S and P for over 20 years and was a budget guy back in the day for El Paso water utilities. So if you had a little too much coffee at break and you're like, I've heard this guy speak before, I'm going to go and take a pit stop down the hall. As we say in the industry, that would be okay because you were number two is my number one. I know Robert can appreciate that too.
Donald Gonzales (
All right, let's get this party started. So Adebola, with all the conversation around ESG, can you tell us a little how Moody's views ESG and how ESG is incorporated into the rating analysis?
Adebola Kushimo (
Sure, I can absolutely do that. I will ask for the slides to be put up on the screen so that the audience can follow along. But Don, to do that, I think it's important to take a step back and remember two things. ESG considerations are not new. ESG has always been a part of the credit analysis and the rating process. Number two, ESG considerations are already baked into the rating. So you know what we've done more recently is enhance the clarity around how we talk about ESG, but the enhanced clarity does not mean and should not be misunderstood as indicating that ESG is changing the rating. What we've done today is not changing the ratings just because of ESG. So what does that mean? How do we assess these considerations? How are they incorporated into our analysis? To do that, we have to take a step back and remember that at Moody's, our ratings are based on methodologies, right? The methodology is a framework that talks about the key inputs that go into the rating process. So let's say for example, you are an issuer that has always dealt with hurricane risk or flood and risk, or you have challenges, financial challenges, governance challenges. That's all being incorporated into the rating. And you also have to remember, in addition to the key factors that go into the rating process part of the methodology, our methodologies have always allowed us to incorporate the most relevant credit risk into the rating process and also into the credit rating. So what's new, what's new is Moody's has enhanced, like I said, the clarity around how we discuss ESG, how we view what we think an issuer's exposure is to ESG considerations and also how these considerations interact with ratings. And to do that, we have identified categories under ES&G and that capture or reflect what we believe are most material to credit quality. So what you're looking at here are all the categories under ES and G, and you can see, for example, sticking with my hurricanes or drought examples, those would fall under physical climate risk. Under our e consideration, if you take a look at the social considerations we have demographics, things like population trends, population distribution, understanding the dynamics of that that's captured in social. And also too on the governance side, you could see we have institutional structure as another example. So we are understanding or articulating how we view an issuer's ability to, let's say, raise revenue. How an issuer is able to cut costs and what flexibility they have under the legal framework within the state. So again, the key message, and as I kind of bring my comments to a close on this question, ESG considerations are tightly woven into the credit process. And that's what you're seeing on this slide, right? On the right side, you could see for cities and counties, these four factors in the first column are the main factors that drive our ratings for cities and counties. But at the same time, you could see if we picked on let's say the state of Texas, because that's where we are right now, when you think about social considerations and think about what's been happening in the state, we've seen strong population growth even through the pandemic, we saw a lot of people move into Texas. We also know that business formation in the state is very strong. There's business expansion. Companies are moving into the state because Texas is a business friendly state when you think about taxes, but what does population growth really mean? That tends to mean that there's increased demand for goods and services. When you have people spending money, they are paying sales taxes. You think about all the economic activity that's generated by having huge population influx. There is residential construction, there is commercial construction. And when you think about the way governments are structured, citizen counties are structured. Citizen counties heavily rely on property taxes and sales taxes for a huge component of their revenue. So when you think about the trends, demographic trends in my example that we've seen across the state, that generally does translate into revenue growth for the state of Texas. It also means that there is increased demand for services infrastructure. We've already spent a lot of time, this particular conference talking about the need for infrastructure and investing going into the future, what that looks like. But I really want the audience, excuse me, to understand that ESG considerations are tightly integrated into the credit rating process. They are not distinct and separate things that we consider. They've always been a part of our rating process. But what we're doing more recently is talk about how an issuer or how we view an issuer's exposure to it. Is it positive, is it negative? Is it neutral? And also to those considerations, how they interact with the rating. Is it positive, is it negative? Is it neutral?
Donald Gonzales (
Great, Thank you AdeBola. So Robert, when did you or SAWS first hear about ESG and what do you think has been the driving force behind it? Has it been issuers like SAWS? Has it been the rating agencies that have been pushing or investors or some outside forces? How would you look at it?
Robert R. Puente (
Well, obviously ESG, the acronym is relatively new, but I think at SAWS we've been looking at that and doing that since its inception. SAWS is relatively 25 years old, so I'm very glad that AdeBola talked about some of the things that they were looking at from the very beginning. So I think we've been meeting that requirement that's out there, at least that goal that's out there from rating agencies when they look at our issuing. And so yes, it's, it's been a process that is much more visible now, but it's always been a part of what we've been doing. For example, especially on the environmental side. There's a whole lot of things that we've been doing. If you can imagine all of you, and I'm not one of you finance people, I'm a lawyer that doesn't do finance. Our business model is to convince our customers to buy less of our product. So how can you possibly survive that way? Well, it's water conservation and we've been very good at water conservation. We are roughly using the same amount of water today as we did 25 years ago. And that's by driving that per capita use down. And so I think that goes in obviously into that environmental bucket, recycled water, all of the water that comes out of our sinks, commodes showers, we collect it, clean it up, put a good portion of back into the environment for spring flows, making its way all the way to the coast for that freshwater saltwater mix that's very important to the tourism industry, to the Bayes nest trees and to the fishing industry. But a good portion of it, we pump back into San Antonio in a ring around Bear County with spokes that sends recycled water to a lot of different users, manufacturers, institutions, anyone that wants to irrigate the nation's largest recycled water system. So again, I think that checks off that E part. And this wasn't in the last five years or so. This is something that's been on in our system for over 15 years. So those kinds of things are very important. Again, I want to reference AdeBola as much as possible because she rates saws on a regular basis. She talked about droughts and how we are not resilient. We have the nation's largest underground storage of water in an aquifer. We take water out of the Edwards aquifer. It's permitted, you only allowed a certain amount per year. It doesn't roll over into the next year. And so what we don't use, what we don't sell to our customers, we still pump it out. Cause otherwise you have to pay for it anyway. And we pump it into a different aquifer further south and store it there. So at the beginning it was sort of like a CD. You put some in and just leave it there for a while and you take it out when you really need it. And now it's like a long-term investment because our deposits, because we've had a series of rainy years and it's been able to grow. We have, like I said, the nation's largest underground storage of water and it's roughly one year's worth of our supply, our complete supply. So all those things I think factor into what we have been doing. Social I think is also very important. Obviously we have some of the lowest rates in Texas of the major cities. Dallas is lower than ours, but we're right there with them. And so all the other cities have much higher rates. Governance is obviously always very important. We've always had a very diverse governing body. Our board, we are part of the city of San Antonio, but we have our own separate board. It's always been very diverse, whether it's gender or ethnicity or race. Our employees also reflect our community as far as the diversity of them. I'm very proud to say that three out of the highest paid employees at Solace are females. So that issue is also I think, taken care of. So although it's a relatively new acronym that's being used a whole lot now, I think SAWS has always been there in trying to make sure that we check these off, not just for obviously ratings, but because I think that's the right thing to do.
Donald Gonzales (
Great. We appreciate those insights and your leadership on that. So Ted Hilltop securities perspective on ESG and some of the things that Hilltop's been doing, what advice have you been providing to clients and what are some of those aspects that y'all have emphasized, please?
Ted Chapman (
Yeah, sure. So step back and look at it. So ESG ,SPO, TCFD, PRI, STG, GSS, SB KPI, DEI. You see where I'm going with this, right?
Donald Gonzales (
You need to buy a vowel, right?
Ted Chapman (
I think one of the first things that you do is just educate because we know it's evolving. We know that, gosh, we wish we could have this, but it's not clear yet or it's still kind of work in progress. I think maybe kind of the best way is just you all are in Texas, it's a football state. Let me ask you because I just want to make sure you don't have cookie coma. I'm going to be one of those knuckleheads that does a quick show of hands, quick show of hands, how many people have ever heard of a guy named Donovan Smith? All right, maybe you've heard of one of his former coworkers, A guy named Tom Brady had kind of a successful career. You may have heard of his wife. All right, so where I'm going with that is Donovan Smith, he recently got cut, but he used to be employed by the Tampa Bay Buccaneers. He was their left tackle meaning that he protected Tom Brady's blindside, right? So you would never hear his name unless Tom Brady was lying in a heap on the turf or there was a pen, like a holding penalty or something against Donovan. Otherwise you never heard his name because if he didn't hear his name, he was doing his job. I think everybody might want to be Tom Brady, but probably the better course of action is be Donovan Smith. How can you identify risk? Because that's really all ESG is ever supposed to be is one sort of tool in the toolbox of the overall umbrella of what falls under risk management. And even if you're doing just the most basic McKinsey 101 of all, right, on one axis, what could go wrong? And on another axis, how bad could it be if it does go wrong? I mean, if you're at least doing that, that's good. It's a lot better if you try and quantify it, especially in dollars or just some other kind of commitment of resources. But I mean, in the industry, we have to help our clients. I mean, we have a fiduciary responsibility to our clients. And so the SEC kind of frowns on things if you don't disclose, and we all know that that's a part of the G bucket, but you identify risks, what could go wrong, how bad could it be? And those are the kind of things that you just sort of educate the clients on our clients. But to AdeBola's point, I mean it's stuff that the rating agencies and the financial community have always kind of kicked the tires on, especially as there was more interest in the underlying credit rating and you didn't worry. Or maybe there just was no availability for bond insurance or lesser availability for it. So people want to know like, all right, what is this real? What is this all about? What is the exposure? What is the risk? And so I think that's where you try and just really do a deeper dive and tell the client like, okay, look, here's what all of these acronyms mean, but hopefully it's part of the risk management that you've been doing all along. If you need to pump it up a little bit and do a little bit more, fine, here's some strategies. Here are things that you can do that might be relevant in material because you'll probably hear all of us say that quite a bit this afternoon. Got to rise to the level of relevance and material. Otherwise, I mean, again, not all ESG factors are credit relevant. Not all credit factors are ESG, but sort of where that good old fashioned Venn diagram overlaps. That's the area that you want to say, all right, that's potentially material that's potentially relevant. Let's identify it. Let's manage it. Let's disclose it.
Donald Gonzales (
Thank you, Ted. So Nick, obviously we're here in Texas at the Texas Public Policy Foundation. Some of you all may have seen this. They say that ESG stands for everyone's suffering guaranteed. And so you see different things across the country. What are you seeing from your more broader perspective across the country?
Nicholas Donias (
So the most common response when we propose doing an ESG financing is the effort worth the benefit. And that's pretty hard to quantify. But there are two camps. There's one that say of course, and the common theme we're hearing here is that there's nothing that you're not already doing. Disclosing building projects that have a green component, whether it's rapid transit, whether it's a flood diversion, sustainable infrastructure, there's those issuers that notice that, yes, we're already doing this. We want that marketing, we want that demand for our paper. And so it becomes an easy education process. And they're the others who have a more pessimistic view, like what you just said, that think it's all just marketing, that it's not worth the effort that I have to do more disclosure. And I think the job that falls on the underwriters is part of that education that we can take a lot of that burden off by focusing on what are the green parts of this project? Disclosing them, writing the paper, handing them to a second party opinion and getting that ESG label. And so although it's still mixed, and I think so far we get more of the pessimistic view of we have so much to do. Do I really want to put this ESG label? There are those who are certain to realize, hey, it's not different from what we're already doing.
Donald Gonzales (
Great. So Adebola, drilling down a little bit, how much of a factor does Moody's look at in terms of waiting ESG in the assessment and overall credit rating?
Adebola Kushimo (
That's a good question, Dawn. I mean, I think again, it's important to remember that ESG is not ESG considerations or when we think about the risks associated with that, they are not separate and distinct from credit fundamental credit analysis. In the slide that I showed just a few minutes ago, you saw how social considerations perhaps interact with some of the other core credit factors, or even still how governance considerations interact with some of the core credit factors. What we have found to be particularly useful, because again, data is publicly available on a number of different topics or a number of different categories. So say for example, if you were thinking about social data, you can get a lot of data from the Census Bureau standard data from federal government sources. But if you start to think about what is an entity doing to manage its risk, that is not always publicly disclosed. So as we engage with issuers, it's always very helpful to understand how does the government, does the governing body view this particular risk and what are the plans that they're thinking about or they're proposing or perhaps even infrastructure projects that they expect over a time horizon to increase the mitigation or to increase their resiliency for these projects. I remember if you're an entity, Mr. Puente talked about saws and drought conditions. Certainly in several parts of the state of Texas, we do have issuers that deal with drought conditions. We also have issuers that deal with hurricane risk. If you look at the reports from 20 years ago, 10 years ago, that information is in the report. But what you're probably finding out more now as we do our reporting and as we put out commentary on issuers, is you're perhaps seen dedicated space in the report that talks about this is exactly what this risk is and this is how reevaluated and this is what it means for the credit profile.
Donald Gonzales (
Is there any specific percentage that issuers should be aware of or has the percentage grown or changed in the last several years? Is this seems to be talked about more and more?
Adebola Kushimo (
Sure. So the way that I translate your question, Don, is if I looked at the methodology, for example, our ESG considerations, 10% let's say of the methodology for cities and counties, and the answer is no, right? But what we're really focused on is if an entity has repeated hurricane issues, and let's say they have, they've had to invest in infrastructure, what is their total debt liability? What is their total leverage? If you are an entity that is prone to, let's say other weather events, and we know that when a weather event happens, it takes a while for insurance to come in, it takes a while for FEMA to come in. So we do ask questions like how much reserves are available to be able to buy you some time before external help comes in? So again, our methodologies really focus on the fundamental credit factors. We do consider ESG to the extent that they are relevant and material for the issuer or for the rating process. And also to, we don't consider ESG considerations in isolation. We think about what does this mean given the reserves that the issuer has, what does this mean? If this issuer wants to take on a very expensive infrastructure project, what is their total leverage? Can the credit profile at the current rating accommodate the leverage?
Donald Gonzales (
Great, Thank you for that. So Robert, so SAWS who's probably had some of the most robust disclosure of just about any issuer has probably been the gold standard with respect to e sg before ESG was really even I think talked about as ESG. So with all of that that you all do internally and what you do in your own disclosure document, how does that change or how has it changed in terms of what you communicate to your executive team, your board and other staff? Is ESG one of those things like when you have your weekly meetings, this component's going to be something we're going to talk about, or is this been something that you've always done and going to always continue to do?
Robert R. Puente (
Well, the answer is no. I don't think it's ever has been a topic in and of itself in our leadership team meetings. In our executive meetings, it's really very ingrown into what we do. As I mentioned, I've been that SAWS 15 years now. And so the executive team, the entire executive team, except for one individual, I've had the opportunity to be very involved in their hiring. And so these individuals, through the hiring process, which is again a built-in process already, I think we know that they're going to be the individuals that will further our mission. And essentially our mission is to provide waste water and water services to our customers as affordable as possible. And I think that all goes into that ESG kind of situation. And so the job requirements essentially, for example of our coo, which we're still trying to find, is obviously to run the system in the best way possible and the best way possible just happens to fall under the environmental part, especially to make sure that we do the things that we're supposed to do and taking care of the environment. For example, Adebola talked about resiliency and about reserves and what kind of reserves you have. As we know here in Texas, we experienced a huge winter storm a couple of years ago, wind storm nearing 2021. And how were we able to respond to it? Luckily, our leadership team got together and one of the first things we decided to do was immediately hire an outside firm to audit us. What did we do and what did we do wrong during this storm? Our reaction to it, our preparations for it, the after effects of it. And I think this showed the public, but also the credit rating agencies, that we were responsive enough to do something like that, to know that there might be a resiliency problem and how we were going to handle that event in and of itself cost us money. And the response to it is costing us money. And right now and back then also had the highest reserves that we've had in our time, in my time there at sas and during that time and presently we've also had the highest credit ratings that we've had. So I think the leadership team knows that our job is to be very responsive to whatever is happening, whether it's a weather event, whether it's just some of the after effects of covid, such as labor shortages and supply chain issues, to just be responsible as possible as that. And if you are, again, I think you check off these things automatically, the ESG.
Donald Gonzales (
Great, thank you. Nick. When we look at the value, particularly financially by issuers, by working to comply with ESG guide guidelines or green bonds, have you seen that the issuers look back and say, yeah, this was something worthwhile, it was worth doing because you've got upfront work to do, you've got compliance that you need to do, you've got monitoring that you need to do. Have they come back to you and said, Hey, that was a good call that we got value in pricing and so on and so forth?
Nicholas Donias (
Yeah, I think it's hard to say with on the pricing side, I don't think there's enough data out there to compare one issue versus another that was labeled green. But I think definitely on the demand side, anytime that we've issued a green bond or a green type of product, we definitely see more over subscription than non labeled products. And I think that's a source of a lot of institutions. A lot of buyers, investors have these targets to achieve so much X billion of dollars invested into green green investments. And so I think as time goes on, as they're reaching the sunset of when they need to achieve those goals, I think there's going to start to see more and more of those benefits. I know my institution itself has a similar target and we're really gearing up to saying we have to say no to this, but do more of that. And so I think soon we'll start to see more of that benefit financially. On the other end, there are sustainable linked loans or bonds that have an interest rate adjustment if a certain metric is hit. I think there's still hard ways to determine how do we actually measure that success of green. And so anything that's new and fast coming like ESG has been, there's some learning and I think that side of the product is having some learnings have to do with it that if we, did we actually meet that target? Does the investor really want to take a lower interest rate? So I think there's still some things to be seen there.
Donald Gonzales (
Ted, you all seen any pricing benefits by labeling bonds as green? And do you think the additional costs that sometimes are associated with that because there's not a whole lot of firms out there that'll certify a project as green and then the ongoing maintenance that you've got to do to make sure that from a surveillance perspective, those are adhered to anything you're getting from feedback and your issuers?
Ted Chapman (
Yeah, I mean generally, if you want to look at here's the EU, here's corporate America, here's US Munis. I mean, it's still, as has been said, it's evolving. There isn't really enough data yet, but the early signals magic eight ball says no. If I could get my slides pulled up, please, I'll torture you while he's pulling up my slides. Do the quick show of hands again, I know we have a very diverse audience of those that have all members of the financial community, but of those that are in the audience, how many of you are issuers? I issue municipal bonds. I'm a local government. I'm an authority utility board. Raise your hand again, if you have enough people in your department, raise your hand if your budget is big enough. I mean joking, but not joking. Municipal employment state and local government employment has not yet even exceeded pre great recession levels. That's 15 years ago. So I think one of the things that is important, I don't know where I need to point this. There we go. I think one of the things that's important to focus on, actually, lemme go one more slide, yeah, there isn't enough data yet. I'm not saying sh heck with it, don't try it. I'm saying that there isn't enough data yet. It has not yet seemed to be. I mean, okay, fine. Let's say that you're using the analogy of your mortgage and you, oh, you get four and a quarter instead of 4.28. Are you technically saving a little bit? Yeah, I mean if you can squeeze out a couple of basis points, there's been plenty of anecdotes of that. That's not completely unusual, but it's not common across the board, well embedded. So one of the examples I wanted to put up here, New York water, they've got only about 32, 33 billion of debt. Outstanding. Senior lane, junior lane, they did a refunding a couple actually about a month or so ago. And if you look on the left hand side, you can see if you were an investor, and by the way, they have a lot like SAWS, I mean best in class management. They disclose the identify risk management is really, really good here. Their documents have several pages just on the E risk, the climate risk, going all the way back to Sandy and all of the things that they've done since then. They do have a little bit of work to do on the wastewater side especially. They've got a fairly large unfunded mandate, typical spend for them on total capital commitments, almost 3 billion a year. Typical debt service payment, three, 400 billion a year, pretty big budget. And you can see there's still a lot yet to be done. The core of engineers said, yeah, we could probably do seawalls for about 50 billion and that a geo bond authorization from of their 4 billion about a year ago. So yeah, they're trying to prepare their disclosure's very good, but they still do have a lot of risks that are identified. And you can see, I mean the e ESG scores, and again, those are not ratings, those are just supplemental. I don't want to call 'em data points that reduces 'em too much, but supplemental pieces of information, is that fair? AdeBoal, the scores, I mean it's not a rating, but it supplements the rating opinion with additional data risks and strengths. But you can see a score of three, it's a one to five generally one is the best, two is neutral, three, four and five are various degrees of negative. So the rating agencies are already telling you it's more likely that ESG factors are going to be negative than positive. And so you see all of those billions of dollars of commitments up there to address the E risk. And you're thinking that's potentially a lot of negatives. And so you look, well, okay, well fine. How did that price it based? It price based solely on fundamentals? So what that's showing up there is you would expect that to be a little bit more expensive than the AAA curve pretty much right in line with the AA curve. And that's exactly where it was. And if you see it get a little bit wonky out at year 10, but what happens to most muni bonds after 10 years, they become cullable. So that's just call, that's a call risk. It was nothing else. So if it's not budging the needle for them, it's probably not going to budge the needle for smaller issuers. But again, I'm not saying don't do it. I'm saying that it has not been ingrained long enough because I mean we're still fighting over definitions and metrics. We all sort of have this general idea of it's a good thing to have. My boss, our head of municipal credit, Yaha Ratner, the last couple of years has started doing an investor survey and basically it's sort of a finger on the pulse and it looks at all issues like what sectors do you see most at risk and what do you think about this and this? And generally, actually overwhelmingly the response has been ESG, great to have not budging my needle, great to have not budging my needle, I'm still looking at the traditional stuff. I am looking at liquidity in case there is an event. I am looking at covenants and waterfalls and just all of the traditional stuff is, at least right now, I'm not saying it's forever going to be that way, but as of right now, it's not budging the needle.
Donald Gonzales (
Thank you. So Robert, I'm going to move down a little bit and focus more on the social aspects of ESG. What are some of the actions that saws has taken and what would you say have been some of the benefits of that that you can maybe share with us?
Robert R. Puente (
The social part of it? I think the most important part of our utility is our employees making sure that when they come to work, they go back home in the same physical condition. We do have a lot of field employees that are out there in the middle of traffic working in the summertime, in the summer heat or the freezing cold. So safety is a big issue, a lot of moving things that are out there. So we engaged a private company to come in and kind of reevaluate what we do and how we do it to give us the best of class kind of tools to work on, evaluate us to see how we can push down that incident rate that we might be having. So that was very important also, again, to taking care of employees. Unfortunately, SAWS was fell victim to and contributed to the inflationary rate because we raised our salaries quite a bit for our employees. Any employee making less than a hundred thousand dollars got a 10% raise. Traditionally we've been able to give them a 2.5, maybe 3.5% raise almost every year, but we did it 10% all at once. Not only that, we did it eight months before they normally would get it. They normally get their raises around the April timeframe. We did it back in September of the previous year because we were losing employees. We were not able to attract employees. Some of these jobs were very, very difficult. And so we needed to do that and we had to do that. At the same time, San Antonio is not a rich community. We have our share of poverty there. We understand that there's a certain amount of expectation that people are able to have water. It's obviously a big necessity. During the covid time period, we suspended a disconnection to the customers that could not pay or sometimes would not pay. And so we did it for about 18 months where we would not disconnect anyone's water during that time period. We did create a huge debt on it, but thank goodness we had good reserves, good cash on hand to take care of that, and we budgeted for it. We understood that that was going to be happening and was not going to be able to just turn that policy around quickly. So that was very important. Also, very important was the overall affordability of our water, not just affordability to those that could not pay for it in the sense that they were low income or had not a very high wage paying job was to make water overall affordable. So we restructured our rates. Our massive growth over the last four or five years showed that residents were paying more than their fair share compared to business compared to commercial. So our rate structuring we looked at and cost of service, we readjusted that. We found out that residents were paying their proportional share more than business. So every sewer customer, every residential sewer customer got a rate decrease and 83% of our customers got a water decrease also. So an overall decrease, that was pretty good. So that's in and of itself making water overall affordable. But within that change, we also made a change and up created a program called Uplift to where we have about 35,000 families and it grows every year and we put more money into it every year to help. And we subsidize the monthly bill of a lot of our residents. So they have to qualify for it, they register for it, and it is now a line item on the bill so that everyone knows what kind of money is used to pay for this program. So if at the lower levels, if you have a very basic use of water, it's almost free. We lowered the fixed cost, which normally everyone has to pay and to pay for that. Obviously the more water you use, the more you will have to pay for it. Each unit, each gallon will be more expensive the more you use. So I think the social part, again, is something that we take very seriously and those are three examples that we have.
Donald Gonzales (
Very good. Thank you. AdeBola. So when we look at ESG and focusing a little bit more on the S and the G, and are we seeing more issuers saying, I want to make sure that I'm fulfilling the rating agency's expectations. I want my bonds to be labeled green. I want you to look at us in a certain way, or is it just certain parts of the country that may be doing that and others are kind of shying away? What are you seeing across the country from that perspective?
Adebola Kushimo (
So in terms of green Bonds or social impact bonds, we being the rating analysts in the Dallas office don't have a lot of interaction with that. But the way that I also interpret your question is what observations are we seeing across the sector? What are we seeing when we think about social considerations? What are we seeing when we think about governance considerations and what's, what is the interaction with the rating? Right? What we've found is what we've observed, generally ESG considerations are neutral to low for the credit rating. They're not really making a difference either way. When specifically on the S & G governance, the exposure to governance is very strong, overwhelmingly positive. And I think that's because of the structure that is in place in the states, the flexibility that governments have to raise revenues to the extent that they can, the flexibility that they have to cut costs, the disclosure, all of that governance specifically for the state of Texas. But I would even take it farther and say when you look across the local government portfolio, even the state's theme portfolio, exposure to governance is very strong. Social considerations, our observation is generally neutral to low. Now of course, we are in Texas, so if you carve out the category that talks about demographics, you will see several local governments within the state of Texas be very strong, have very strong exposure when you think about demographic considerations. And then environmental overall neutral to low is the exposure that we see in our portfolio, but also remember that in Texas we do have some isolated pockets where there are drought conditions or there is exposure to things like hurricanes or carbon transition.
Donald Gonzales (
Great. I was going to ask a question, but I just got signaled we don't have much time. I was going to say, so what really happens in these rating committees, pretend Janice and Alexandro and Gera are not here, but we may have to save that till the end if we have time. So Nick going focusing more on the G and then I'm going to come back to Robert on this, but from a governance perspective, are you seeing things are getting more intense as you know, ESG discussions seem to be ramping up or is it kind of, well, it's no big deal, it's something that we just need to do and we're just going to do it and move on? What are you hearing?
Nicholas Donias (
I think it's more, it's a mix for whoever issue we're talking to, but I think back to when folks think is it worth it or not? We have had, we've worked on issues that it's green or it's sustainable, they have a big press release, and for the issuer that we just did a bond or issue for that didn't do it, there's a bit of that FOMO or regret that like, oh wow, my quote competitor did this and we didn't. It's a bit of explaining that any, so in the past year, I think we, we've worked on about five green bonds, our sustainable bonds, and in each one of those cases, it took only about two to four weeks to get the report done and get it stamped by a second party opinion. So when it comes down to it, the work is just convincing ourselves that it doesn't take that much effort. And so I think just getting over that hump is the next phase when you see more and more folks doing it, when there's a pattern to it and that there could be an easy way to do it. For one issuer, we just created a sustainable 20 pager posted online, and for any new issue, they can just refer back to that packet and they get a green label. So overall, I think it's more just education about is there a benefit or not. Maybe there will be, is it a lot of work in the end, probably not. So I think that's kind of the conversations we're having more.
Donald Gonzales (
So Robert, as you mentioned earlier, you've got your board, you also have city council and city manager. So from a governance perspective, how do you figure out is this something that needs to go to the board then to city council, or does it be something between you and the city manager? Yeah. How do you go about it and say, is this, am I doing it this way because of ESG considerations? Or what's kind of the driving force between why you would go one direction versus another?
Robert R. Puente (
Well, a lot of it is who should know and when should they know? As you mentioned, the city of San Antonio owns us, but we're separate from them. They appoint our board. So we're a totally separate unit. We're not like Houston Dallas, where the water department is a department of the city. I have the luxury of not having to worry about airports, about parks, about animal control. I can concentrate on these two things, water and wastewater. So that's very important. So it does give us that flexibility. What's unique about sas however, is that the elected mayor is always on our board. So any big issue that requires a city council approval, or at least politically that they support what we're doing, the mayor hears about it. The mayor's briefed about it because he's on our board. He gets to vote on it before he goes to council. So anytime we need a rate increase, he or she has heard about it and understands the need for that rate increase and essentially has voted for it already before it's gone to council. And so those are things that are very important, I think is the way we handle them. I do get caught in the situation sometimes between staff, the city staff and the city's elected officials because the elected officials themselves, the city council members often see things differently than city staff. They want something done right away. They're not that concerned about what it cost constituent pressure to do something right away. Maybe it has something to do with the San Antonio water system. And so we do have to have a very good relationship to make sure that those kinds of things happen. The most basic thing, for example, is just tearing up of a street to change the city's repaving or doing some drainage project, and we have our water lines or sewer lines in there. So that coordination is very important, but invariably, sometimes the city manager or the city council members get involved. And so you just have to work through that.
Donald Gonzales (
Great, Thank you. We probably have time for one question. Does anyone in the audience have anything they'd like to raise something juicy? Hopefully No guts, no glory. I have a question. All right.
Audience Member 1 (
I have a question for AdeBola. What is the ESG.If a municipality hypothetically was hit with a consent decree, how do you assess ESG on a social aspect?
Adebola Kushimo (
Sure. So we didn't spend a lot of time on this, but as part of our ESG classification, we have one classification for cities and counties, which is the public sector classification. And then we also have the private sector classification for any entity that functions more like a business, which is where the utility systems would fall in. So typically when you have a consent decree, there is an estimated amount of the infrastructure investment that is required. And there's also a timeframe that is required. So I know the example that you're speaking of, but I wouldn't put it out there because you didn't put it out there. But what we ultimately do is take a step back.
Donald Gonzales (
Let's put it out there.
Adebola Kushimo (
What we ultimately do is take a step back and think about how affordable is this particular investment for the utility system. One of the ways that we do that is we express or we look at the consent decree as a percentage of operating revenues, you stay closer to the two to three times. We have generally found that to be affordable because again, these projects are over 10 years, 12 years, 15 years. And also to governance becomes a key consideration. It's always important for us to understand one, that the governance team has the expertise to be able to stay on schedule. That is part of the requirement of the consent decree. So these projects are done on time. They executed on time, understanding the plan behind the consent decree, and also as we follow the project, is the governing team able to meet the expectations or are there surprises along the way? So in it of itself, consent decrees are not necessarily, they're not necessarily a credit driver, haven't seen, we've seen some ratings change because of the consent decree. But again, that's taking a look at that consent decree and all the other factors. Perhaps that utility system was already very highly leveraged. But in the example that you are talking about, we didn't have a rating change. Don't worry, Don. We can talk about it later. We didn't have our rating change because it is affordable, the governance team, the management team has put out a plan that is reasonable given the horizon of that particular decree. Even though we do acknowledge, when you look at our water wastewater systems, we do acknowledge that water wastewater systems always face challenges coming to providing clean and safe water. There's a lot of regulatory considerations in that particular space. And the potential for something to go awry is high for a lot of reasons that may be outside the utility systems control.
Robert R. Puente (
If I may, Don, could I just add that I would hope that I was hoping AdeBola would say, just follow San Antonio's example, we just this year will finish our 10 year billion dollar consent decree, met every single requirement and during that time, got a rate increase every single year to pay for it and got a credit increase during that time also.
Donald Gonzales (
You're here. Congratulations. Alright, I think that is the conclusion of our panel. Thank you all very much.