Wednesday, October 15, 2014

In Good Company

WEFTEC, the annual trade show for the folks who serve our nation’s wastewater systems, has come and gone again. WEFTEC is put on each year by the amazing staff at the Water Environment Federation, and rotates between Chicago and New Orleans.  I attended this year in the Big Easy and was yet again staggered by what I saw:

  • The size and scale of the businesses and services that serve this cause.  Although there is a new report that emphasizes the economic and community vitality that we drive – one need but see the floor of the convention center to be amazed by this reality.   The floor was nearly a half mile long and about a football field in width, teeming with people describing a nearly endless array of innovative goods and services.
  • The remarkable creativity of the people who do our work, and their willingness to help their brethren.  From dawn to dusk from Saturday to Wednesday, programs and seminars on almost every conceivable topic burst with vision and wisdom.

For me, I arrived on Sunday evening and spoke at my first event at 7:15 on Monday morning – to the annual breakfast of the American Association of Environmental Engineers and Scientists (AAEE).  AAEES’ membership list is a who’s who of some of the most accomplished members of our profession, and much of what they focus on is both how to create suitable technical standards to underscore our work and people, and also to identify and highlight the best of scientific and engineering accomplishments of these same people.  I was honored to be there.

Yet as I scurried from one engagement to the next, I took away three special messages:

  1.  EPA Administrator Gina McCarthy knows water!  During the opening morning plenary, the Administrator spoke to a huge, standing-room only crowd in a gigantic ballroom.  The Administrator is known for her expertise on air issues and climate change, given her prior position as Assistant Administrator for Air at EPA.  Some of us were concerned that maybe she would not be as attentive to water issues.  I can state with certainty that this worry was put to rest. 
    The Administrator spoke with authority on water issues, painting a compelling picture that water (is) will be the first and perhaps most important measure of climate change, and that the protection of water when there is both growing scarcity and flooding is becoming more important, not less.  She explained the need and importance of an updated definition of the “waters of the United States” for the Clean Water Act, and the need for both increased flexibility in implementation, yet continued focus on reducing nutrient pollution.  Mindful of algae blooms in Lake Erie and droughts in the West, the Administrator has a command of water issues and is a powerful voice for us at the helm of our nation’s environmental agency.
  2. The Johnson Foundation released a remarkable report that is the capstone of a six-year effort to chart a new future for water in the United States.  I was honored to be asked to provide brief remarks about the report, which I have already read and annotated!  While I am mindful that reports on almost any topic seem to be published by the day, I am certain that this one is different. 
    Unlike many reports on water, the Charting New Waters report does not spend much time on why we need to act.  This report, neatly organized and well written, is about what we need to do and how.  It is a practical roadmap, a game plan for any coach of a water team, of the extraordinary flowering of creative ideas and approaches that can leap-frog our enterprises to new levels of service, effectiveness and efficiency.  And the best part is that every idea is tied to examples – real world examples that demonstrate the words go beyond fascinating ideas, but have already been developed and implemented by some of the best of us in the industry. 

    I applaud the work of the Johnson Foundation at Wingspread, their creative and charismatic project leader Lynn Broaddus, and John Ehrmann and Molly Mayo of the Meridian Institute who helped create the report.  Honestly, if I were to suggest one read for our industry this year it would be Charting New Waters.  I guarantee your copy will have underlines and notes in the margins like mine does.  It captures this moment in time – one where our industry is changing because it must, led by the spirit and ideas of our own. 

  3. Water Works!  Once again, we also emphasized the economic and community vitality we are driving in the water industry.  SanFrancisco PUC General Manager Harlan Kelly seemed to be everywhere, representing a group of 30 General Managers who have banded together to tell the story of the strength of our industry.  WEF highlighted the importance of the study we published about the hundreds of billions of dollars of work we will be undertaking over the next decade, and the tens of thousands of jobs we will foster.

My most significant take-away, again, is to admire the people who work in our industry.   We are a group that is dedicated to public service, are problem-solvers to our core, and both creative and practical.  I congratulate WEF on another extraordinary year of WEFTEC, and look forward to next year in Chicago.  

Wednesday, October 8, 2014

Bravo for the Anacostia Watershed Society!

Kingman Island, Northeast Washington, D.C.
The Anacostia Watershed Society celebrated its 25th Anniversary recently on the banks of the Anacostia River in Washington, DC.  I was delighted to be there and to share the podium with the Honorable Anthony Williams, founder Robert Boone and a new friend from Boston – more on that in a moment.  For my part, I was pleased to emphasize that the people who give, work or volunteer for AWS are undertaking the most important work for the River.  Why?

Because people are at the heart of any action.  People must care about the river.  People must enjoy the river. People must monitor and report on the condition of the river.  People must advocate for change.  Informed, thoughtful people are what drives government, businesses, and other community organizations to act.  The action, though, starts with the people – not the other way around.

The proud Wild Rice seed collection team.

When dedicated people take on almost any issue in this manner - supported by science-based assessments of what is going on and what is needed, presented in thoughtful and reasoned arguments of what needs to be done and why – the world changes!

Only an organization, like the AWS, that cares about the whole watershed and sees the river as a vibrant system can safeguard the health of the entire waterway. Unlike government entities who can only govern sections of the watershed’s tributaries, and all of the land that drain to those waterways, AWS is free to take a holistic approach to protecting the watershed.

And AWS has been brilliant.  Starting from its roots in the heart and mind of Bob Boone, one of the most deeply passionate, and deeply principled environmental advocates I have met – AWS has helped lift the Anacostia River from polluted and forgotten obscurity to prominence as the “it” river for the current day. 

Countless boat trips, presentations, stream clean-ups, community meetings and volunteer monitoring efforts have introduced countless people to the River.  Some of the countless people include Senator Ben Cardin, House Minority Leader Steny Hoyer, House Minority Whip Chris Van Hollen, Congresswoman Eleanor Holmes Norton, every mayor of the District since Anthony Williams and local officials from every jurisdiction in the watershed.
Summer evenings on the Anacostia river.
All of us have both marveled at the beauty of the river, the improvements that have been achieved, yet the heart-breaking challenges that still remain.

We also heard from Tom Sieniewicz from the Charles River Watershed Association at the event – which is just about twice as old an organization at 50 years.  He highlighted that the Charles River, another great waterway of a great older city, was graded at a D in 1994.  Yet after 20 years of committed dedicated effort since that date, the Charles received an A- in 2014.  Wow – an urban waterway, the Charles River in Boston, from D to A- in 20 years!

Two messages resonated with me.  One is that we can succeed!  Just as people can now swim in the Charles River, we can achieve the same for the Anacostia.  Fishable and swimmable on the Anacostia is possible…

The second is that the AWS is instrumental to the prospects for the Anacostia and its many neighborhoods. Its energetic membership and staff, led by superstar Jim Foster, who followed fellow superstar Jim Connolly, understands that people are the cornerstone of the future of the river.

DC Water will certainly do our part – and the Clean Rivers Project will drive the most significant improvements to the River in the last many decades.  Yet it is the Anacostia Watershed Society that is at the core of this effort.  We should all celebrate their 25th birthday, and join in helping them continue celebrating long into the future!

We all share in their success!

Tuesday, September 30, 2014

Water works!

Earlier this month I joined my colleague Harlan Kelly, GM of the San Francisco Public Utilities Commission (water, sewer and power) and Tony Parrott, Executive Director of the Metropolitan District of Greater Cincinnati to launch a national effort to convene the chief executives of water utilities to focus on one principal issue: the economic and community benefits that spring from our work, to parallel the obvious attention that is given to the costs. 

In every jurisdiction, water and sewer rates – however configured – are rising as old infrastructure is updated and new regulatory mandates and technological opportunities are implemented. We felt that attention has to be focused not just on rising costs, but on the opportunities we provide for good jobs, improved neighborhoods, and new businesses. From initial meetings in early 2014, we completed a study – founded on a survey of 30 municipal authorities – of our economic and community characteristics. Here in Washington in mid-September, the Water Environment Research Foundation (WERF) and the Water Research Foundation (WRF) released a report that highlights the economic activity driven by these 30 utilities. The report found that:
  • Thirty of the largest water and wastewater agencies will invest more than $230 billion over next decade; and
  • these agencies support 289,000 permanent good-paying jobs, annually, strengthening America’s middle class; and
  • DC Water will contribute $13.1 billion in economic activity over ten years; and
  • The Authority will provide 7, 090 jobs over the next years.

I also take pride in the fact that the group chose to adopt the name DC Water uses for its own jobs program – DC Water Works – by calling the national effort “Water Works!” The entire report can be found on the Water Works! website, and a DC Water-specific fact sheet is available online here. We will continue to emphasize the importance our organizations play in the communities we serve.

Tuesday, September 16, 2014

An Award We All Share

I was surprised and honored to receive the George Warren Fuller Award at the recent Chesapeake Bay Tri-Association Conference in Ocean City. Tri-Con is a joint meeting of regional sections of the American Water Works Association, the Water Environment Federation, and the Waste Water Treatment Operators Association.

I was surprised, because I was attending the conference to accept an award on behalf of our Innovations Chief Sudhir Murthy, who was unable to attend due to a previously scheduled vacation. I was delighted to learn I had won the Fuller Award when all the past winners converged on my table and escorted me to the podium. The award is the AWWA’s top service award for innovation in technology, management and diplomacy in the water sector. It is named for George Fuller who was instrumental to the establishment of AWWA – the oldest water association in the United States.

I am humbled by the award and noted in my remarks that I feel like a coach receiving an award for a team’s success – with the acute recognition that I am not one of the players on the field for the game itself. It is only through the excellence of DC Water’s personnel – from the Executive Team to every man and woman at every level – that generates the positive energy, ideas and action that rebounds back to recognition for me.

I am also pleased to receive recognition from my colleagues in the business itself, for only those of us in the water world can really appreciate what the work demands. I thank the DC Water Board of Directors again for giving me the opportunity to be part of this great enterprise!

Monday, September 15, 2014

Ice Bucket Challenge Accepted

Ice Bucket Challenge on top of Fort Reno Reservoir's green roof. Photo by Andy Le.
I was hoping I might survive the Ice Bucket Challenge craze unscathed, but my luck ran out when my good friend Julius Ciaccia challenged me. Ciaccia, as we call him, is the Executive Director of the Northeast Ohio Regional Sewer District (NEORSD). He really set the bar very high when he took the challenge – using effluent from one of NEORSD’s wastewater treatment centers. What a great, creative  way to highlight the incredible contribution wastewater treatment makes to clean water every day!

Dewatering shaft for the Clean Rivers Project. Photo by David Kidd.

To try and top that, we first thought of going deep into the new dewatering shaft here at Blue Plains, but then again, maybe dropping ice water on my head from 100+ feet in the air wouldn’t be such a great idea.

So, then we decided to go up instead – on top of one of our water reservoirs where we recently installed a green roof. Green roofs and other green infrastructure capture rainwater and reduce runoff into our storm drains and sewer system, which in turn can reduce combined sewer overflows into our rivers.

So, here it goes, bring on the ice!

And in case you missed it, here is Ciaccia’s original challenge posted on NEORSD's Facebook page.

Thursday, August 7, 2014

Innovation in 3 Easy Steps - Part III - Examples from Everywhere all the Time!

As promised, I am writing a final innovation post about various examples of innovation underway or already in place at DC Water. It’s often thought that water utilities are risk adverse and lacking in innovation. DC Water is challenging this notion and is a prime example of how the water utility sector is moving faster than ever before in taking calculated risks to achieve and provide cheaper, faster and more effective services. Why? For the benefit of our ratepayers. Ultimately every decision we make is in the interest of providing affordable and high quality services 24/7/365.

In my previous posts, I’ve highlighted a few very specific examples and now it’s time to explore how innovation is the core of our business. I’m sure that many utilities could conduct a similar inventory of their current work and realize that innovation is already integrated into most of what we do!  The various short stories and examples I share below demonstrate how DC Water is innovative in all aspects of our business.

Innovation in Financing Research

This first example relates to my previous post on DC Water’s biosolids program. While DC Water is currently executing a significant effort to produce Class A Biosolids, we were already thinking innovatively ten years ago when we saw an opportunity and changed the paradigm under which we contract for the recycling of our biosolids (a valuable carbon and nutrient asset). What did we do? We started requiring contracted biosolids haulers to provide DC Water a nutrient rebate to leverage resources for biosolids research. Originally, the rebate was $1/ton, which DC Water was contractually required to spend on research. Since then, the nutrient rebate has increased to $2/ton, generating $500,000 per year for research, which DC Water uses to fund dozens of projects at several partner universities (including the University of Maryland, Virginia Tech, Bucknell, and others). 

One of the many success stories resulting from this rebate program is research conducted in partnership with Virginia Tech that investigated the benefits of using biosolids as fertilizer. It was previously observed and reported anecdotally that biosolids-fertilized crops were more drought-resistant and produced higher yield than crops fertilized with inorganic chemical products. DC Water partnered with Virginia Tech using research funds from the nutrient rebate program to discover that biosolids have high levels of vital, naturally occurring plant hormones that are crucial for resisting stress. Further research determined that the naturally occurring hormones are produced as byproducts by the microbes at DC Water’s Blue Plains Advanced Wastewater Treatment Plant during nitrogen removal. In short, the research was able to pinpoint why biosolids help crops resist drought more than other fertilizers. In addition to the contribution to scientific knowledge, this result will increase the value of DC Water’s biosolids production. Through the research, DC Water was able to add value to its product, help farmers grow healthy crops, and advance the base of scientific knowledge related to drought resistance. 

Innovation in Restoring an Aging Infrastructure

DC Water spends about $10 million each year replacing damaged or old sewer laterals to minimize leaks. Sewer laterals carry sewage from a house to the main sewer line. They’re a vital part of the system and one of the most important for individual homeowners, because when there’s a problem with your lateral, you know it.

Replacing a sewer lateral is a relatively small repair for us, but a big deal for the homeowner and neighboring homes. Over several days, a crew typically will dig an entire trench, including a hole in the street and sidewalk and through the yard, removing dirt, plants, and sometimes even walls and stairs. Then, the pipe is replaced and everything must be restored. It’s an expensive and time-consuming process.

To save time and money, we now use a trenchless technology called cured-in-place pipe for sewer lateral replacement. Cured-in-place pipe is a soft fabric liner that can be inserted into an old or leaky pipe. The old pipe is cleaned first and the liner is soaked with resin and inserted into the old pipe through an access hole. Then, the resin is heated, causing the liner to harden, essentially forming a new pipe inside the old one. No trench necessary!

The entire repair is faster, cheaper, and less disruptive. So far, we’ve been testing this technology and only a small portion of our lateral repairs have been trenchless, but even that small proportion has saved DC Water over $1 million during the last two years. We’re using that money to replace more laterals faster, preventing potential sewage leaks. And soon, we’ll be expanding the trenchless program, switching two of our traditional crews from the traditional method to trenchless replacement.

Innovation in Wastewater Treatment

Wastewater treatment involves the removal of both carbon and nitrogen. Carbon is mainly associated with organic compounds in the sewage.  Sewage is treated in aerated basins where microorganisms break down these compounds using oxygen, microorganism that also consume carbon for cell growth. Nitrogen is removed in a similar process downstream of the carbon removal stage. The microorganisms that remove nitrogen also require organic carbon as food, but the upstream process is so efficient that there is not enough carbon remaining to feed the nitrogen-removing microbes. So at Blue Plains, as elsewhere, methanol must be added to the nitrogen removal tanks.

To improve this process, our wastewater research staff has developed a process modification that allows continuous pumping of nitrogen removing microorganisms into the carbon-removal tanks. This allows removal of a portion of the nitrogen load without the addition of carbon, taking advantage of carbon already present in the plant flow. As a result, less methanol is needed in the nitrogen removal process – so much less, in fact, that DC Water is saving $1 million per year on buying methanol.

DC Water was awarded a patent for the development of this technology. Initially, the proof of concept was developed at essentially no cost, and installing a dedicated pipe sending sludge from the nitrogen removal stage to the carbon removal stage was constructed at a cost of approximately $200,000 – given the massive savings on methanol, the project paid for itself in less than a year. Innovative solutions that can give that return on investment are what DC Water is all about!

Innovation in Information Technology and Customer Response Time

DC Water tracks significant amounts of valuable information, including maps of our equipment and assets, lists of work orders for our crews, the locations of our vehicles, and problems reported by our customers. While we had several systems to store and view this information, they were unable to communicate with each other. To resolve this challenge, DC Water conceived and developed a single system, called the Integrated Work and Resource Management Solution, which brings all of these different pieces together in one place.

Map showing reported problem and current repair vehicle locations
The new system allows staff in our Command Center to see everything on a single map: vehicle locations, reported problems, and where our equipment is, all in real-time. That means when a customer reports a problem via DC Water’s website ( or on a smartphone, a dispatcher will see the problem immediately appear on a map. The Command Center can view work crews that are nearby and coordinate a response with other groups within DC Water. Work orders can be issued or assigned directly from the map system, saving travel time, improving efficiency, and resolving problems faster.

This view shows a hydrant replacement job and crews assigned
Efficiency gains have already been achieved. Even better, as onboard laptops are deployed, field crews will be able to instantly access this information, no longer needing to contact the Command Center – a 20-minute wait reduced to seconds. In the future, analysis of patterns within the data is expected to allow us to do an even better job predicting and responding to problems. The Integrated Work and Resource Management Solution is just one more way DC Water is working to connect different parts of our business to solve problems and complete repairs even faster.

Innovation in Engineering Solutions

In 2009, DC Water was confronted with a significant problem when a leak developed on the slope of a hill emanating from a 78” transmission water main – that’s a big pipe! The main was critical to continue supplying water to our customers, so it couldn’t be shut off for long. When we inspected the pipe to find the source of the leak, things got even worse: we found some defects in the structure of the pipe itself. Repairing a pipe this size would be a big job no matter what, especially on a hill, but in this case another major water main lies on top of the leaky one. A traditional, open-cut excavation job would have been extremely difficult and incredibly disruptive, not to mention long and expensive. 

Because of the critical nature of this water main and the complicated terrain issues coupled with our concern that we could not keep the main out-of-service for an extended period of time, we needed to look beyond the conventional repair methods. At this time, we found carbon fiber technology as a possible solution for repair of this critical main.  Carbon fiber wrap is a trenchless technology that has its roots in bridge seismic rehabilitation and repair primarily on the west coast since the 1990’s. Here’s how it works. A high-technology fabric made of carbon fibers is bonded to the existing concrete. The high tensile strength of the fabric reinforces the structure and holds the pipe together, repairing the defects and preventing further deterioration.

The use of carbon fiber wrap turned out to be the perfect solution for our leaking 78” water main..  We were able to complete this repair in less than three weeks, saving a substantial amount of time and money over the conventional method and greatly reducing the risk to the other pipe on the same hill.  With the success of this project, we added carbon fiber wrap to our toolbox for complicated repairs that require structural reinforcement in difficult to access and environmentally sensitive locations. 

Innovation in Local Hiring

DC Water has arguably the largest capital program in the District of Columbia with multiple large scale infrastructure projects currently underway at the Blue Plains Advanced Wastewater Treatment Plant and other sites across the city. More major projects are planned over the next 10 years. These projects are largely funded by our ratepayers, and for that reason we've launched the DC Water Works! initiative - a multi-pronged effort to boost local hiring on DC Water projects and manage the employment requirements of contractors.

The majority of workers on DC Water's construction projects are hired and employed by construction contractors and their subcontractors, and there are many opportunities in a variety of trades. DC Water Works! is a targeted campaign initiative to advertise DC Water jobs to local District residents, collaborate with District job training and apprenticeship programs and coordinate an incentive-based program to encourage DC Water contractors to interview and hire District residents.

DC Water Works involves a multi-faceted approach targeting both local residents and contractors. First, we established three satellite job centers created to advertise job vacancies of contractors and provide space for interviews. Second, we began providing a financial incentive of 5 - 10 percent of DC payroll for contractors when local employment goals are met. We’re also placing paid trainees on crews to increase the knowledge and skill base of our local residents. All of these efforts incentivize a process that supports our local economy while providing job training and skills to local residents.

Innovation in Communications

At DC Water, we prioritize our customers as #1 and as a result we’ve invested in building a powerhouse External Affairs Team that is responsible for marketing our brand and communicating about our work. Unlike many utilities, this 13-person team includes a production team with in-house designers and videographers, social media experts, a media manager and a community outreach team. Throughout the year, this group is continually launching impressive District-wide campaigns and outreach events that would otherwise require third-party marketing and communication firms, resulting in significant savings and stellar branding throughout our service area.

The DC Water Outreach Team is particularly innovative in communications. On any given day, this team is tracking dozens of construction projects that are underway in the District and ensuring our customers are informed and satisfied with our work. Part of this outreach includes traditional attendance at community meetings and snail mail notification of upcoming projects. However, DC Water’s construction outreach has moved beyond traditional communications and is taking advantage of social media to connect with our customers, including Twitter, Facebook, Pinterest, YouTube and Flickr. 

In addition to social media, we’ve also implemented an automated workzone notification system in which customers can receive text or email alerts about construction in their neighborhood, including scheduled and emergency work. These alerts are also distributed using Twitter in which DC Water currently has more than 7,000 followers! Every day, our External Affairs Team is on the streets, at public events and on social media communicating with our customers and highlighting the importance and necessity of our work!

And the list goes on …

There are dozens of stories to share about innovation at DC Water and I hope this provides a brief glimpse into how we are working towards becoming a world-class water utility. I am grateful to have a workforce that is eager and willing to think innovatively when challenges arise and find ways we can do our work better, faster and cheaper. It’s becoming what we do best!

And we have only just begun!

Monday, July 21, 2014

100 Good Reasons Why Innovation Must Come From Everywhere in Your Organization

DC Clean Rivers Project
Our challenge is clear.  We have a $3.8 billion ten-year Capital Improvement Program (CIP) supported by our retail and wholesale ratepayer base in the Washington, DC region.  We are at the peak of spending for our CIP now, driving significant yearly rate increases that are well above inflation.

The largest component of the CIP is the DC Clean Rivers Project: a once-in-several lifetimes project to expand fundamentally the capacity of our combined sewer system to reduce by 96% the overflow of a mixture of stormwater and sewage that gushes into our waterways during rainstorms.  Clean Rivers will drive the construction of huge deep underground tunnels that will capture and transport the overflow to our mammoth treatment facility at Blue Plains.

The combined sewer overflow (CSO) design dates back to the late 1800s.  Our solution will last well into the next century.  Our ratepayers are asking why the current generation of customers must pay to solve a problem that spans centuries.  Fair question.

CFO Mark Kim
Innovation is at the core of our solution.  During my interview sixteen months ago with an exciting candidate for Chief Financial Officer – Mark Kim, recruited from New York City with deep investment banking experience in the municipal sector on the private and public side – I asked how he could help with this challenge.  He promised a range of new ideas and started describing ultra long-dated debt, green bond investors and more.  By the way, we were lucky to hire him – and he has been a whirlwind of innovation and skill on almost every aspect of our financial agenda. 

Fast forward to a misty morning in July.  The morning started early, perhaps 6:30 am, forty-two stories up looking over the Hudson River.  Mist was floating off the River, obscuring at times the boats that were crossing to transport folks to work.  I was at the office of Goldman Sachs in New York City preparing for meetings with potential investors.  Our first call was with an investment fund from England.

CFO Mark Kim and I quickly reviewed our “road show.”  We had taped an audio review of the show that matched the power point slides, which was available on-line.  Yet potential investors wanted to meet either in-person or by phone.  So we started our presentation during the first call, but were quickly interrupted by a blizzard of questions: about the debt offering, about our financials, about our governance, about our business model.  This call ended and the next began, one after the other, some on the phone, some in-person, some at Goldman, some at the co-bookrunner Barclays, some at the offices of potential investors.  The roadshow lasted for three days.

Mark told me this was far more intense than the typical road show, matching the intense meetings we had with the three rating agencies: Fitch, Moody’s and Standard & Poor’s.  Why the scrutiny?  Why so many questions?

There are a hundred answers.  One hundred years to be specific, or the maturity of the bonds we planned to issue: century bonds!  Of the thousands upon thousands of bond deals done in the United States, only a few dozen had been structured with a one hundred year maturity – and all those were in the higher education sphere or corporate markets.  Never has a municipal water utility sought to issue a century bond (D.C. Water Considers First-Ever Century Bond by a Public Utility - Governing Magazine, June 20, 2014).

The answer is also green.  In parallel to the century bonds, we were also issuing certified “green” bonds.  While a few issuers had issued self-declared green bonds in the last few years, we were the first in the United States to seek a third party certification on the green nature of the work the bond would fund.  We sought to bring in SRI funds – or Socially Responsible Investment funds – as new investors to DC Water. 

Then the answer comes back to taxes.  For a variety of reasons, there is no market for tax-exempt investors at such long duration debt.  In order to attract investors to a century bond, we also had to enter the taxable market.  Municipalities almost always issue tax-exempt bonds.  The taxable (corporate) market does not know us.

So our innovative solution had two firsts and one oddity:  100 year maturity, green certification, and the taxable market for a municipal issuer.  The first question we had to overcome is why a green century bond?  We have four legs to support the table of our answer: 
  1. Asset-Liability Matching.  The deep tunnel system at the core of the Clean Rivers Project is unique in our CIP due to its minimum useful life of 100 years.  Our own engineering office and an independent engineering assessment confirms that the minimum life of the tunnels is 100 years, and likely much longer.  We are planning to capitalize and depreciate the tunnels over 100 years on our balance sheet once they are completed.  By financing the tunnels over 100 years as well, we have matched up this huge asset with its corresponding liability and financing plan.
  2. Intergenerational Equity.  The Clean Rivers Project solves a problem that dates back to the design of the combined sewer system in the 1880s.  Our solution is designed to last a minimum of 100 years.  Together, this is a project that is resolving a challenge that has a two-century lifespan.  Many ratepayers have asked why a group of citizens from a much shorter time frame (30 or 35-years for more traditional bonds) should pay the cost of this once-in-a-several-generation project.  Our view is that spreading out the cost of a project to all the ratepayers who will realize the benefits of the project – by design – is simply fairer to the entire group.
  3. Green.  Identifying this bond as a “green” bond would bring to the table a group of investors who are limited to investing in projects that are considered socially responsible.  We strongly believe that the tunnels will drive the largest improvement to water quality since the building of Blue Plains.  So, with such an unusual issuance, we wanted to be sure as many investors could be brought into the deal as possible – including socially responsible investors.
  4. Market Opportunity.   Three trends have made this type of transaction possible.  First, absolute interest rates have fallen to historically low levels.  Second, the market is not requiring much of an extra yield premium for taxable bonds.  (Of course, DC Water has to pay a higher interest rate in a taxable transaction than tax-exempt, because the bondholder has to pay taxes on the income they receive from us.)  Third, the market is also not requiring much of a yield premium to seek a 100-year bond.  These characteristics, which are both highly variable and highly unusual, make a 100-year taxable issuance an opportunity in this particular market.
Despite our confidence in the decision, many were initially skeptical about whether we could succeed.  Extending a bond out to 100 years has been done perhaps a dozen times recently, but never by a water utility.    We also wanted to issue a green bond.  Only six bond issuances in the United States have been issued as green bonds – and all were self-declared, which has caused some negative feedback in the media and from environmental groups.  We decided to seek a third party certification of the green nature of our bonds.  Once again, no municipal issuer – in fact no issuer of any kind – had even pursued a certification for a green bond issuance in the United States!

DC Water’s plan was then to achieve several firsts for the industry: a 100-year bond, a certified green bond, and a municipal 100-year green bond!  We had no idea how the market would react, because this was a first in the United States.

Our first obstacle was to overcome any skepticism by our rating agencies (Moody’s, Fitch, and Standard and Poor’s).  Rating agencies are asked to provide a credit rating covering any new debt by an issuer.  When rating agencies provide a rating, though, it is not just for the new debt, but all other outstanding bonds of an enterprise.  When a credit rating is lowered, or an issuer is put on notice for a potential downgrade, it is much harder, or at least more expensive, to borrow money under any terms and conditions.

During the months of April and May, DC Water traveled first to New York City to meet with the rating agencies to discuss our financial plans.  We then hosted the agencies at Blue Plains to describe the deal specifically.  While we had telegraphed we were interested in a long-dated debt last year, the agencies were still not sure how to evaluate such an unusual issuance.  One of the agencies even seemed fairly hostile to the idea, at least at first.

Fortunately, CFO Mark Kim and his team, including our excellent financial advisors at Public Financial Management and our bankers at Goldman and Barclay’s, moved into overdrive and had dozens of conversations with the agencies over several weeks.  In the end, the agencies were convinced by the explanation we outline above, and by the financial safeguards and performance we have delivered over the last decade.  Just a week or two before we planned to go to market, we had received stable ratings by all the agencies – maintaining our strong credit even in relation to a green century bond!

I must say, I am impressed by the professionalism of the rating agencies and how thorough they are in their work.  Our course, I am ultimately pleased they maintained our strong ratings (third best that is possible for any issuer).  But they appropriately evaluated this deal and our financial performance carefully, and were ultimately open to new ideas as long as we could provide sufficient explanations.

Our next step was detailed and exacting work developing a preliminary offering statement (pos) – which is the document investors review to decide whether to invest.  We then reviewed our plans with several committees of our Board of Directors, leading to a formal review by the Board at a special retreat and then a final vote.  After all these steps, we were ready to go to the market.  I must say, DC Water is blessed with a thoughtful and careful Board – which like the rating agencies, engaged with careful due diligence – but was also open to new ideas.

Like a sales plan for any product, we had to market our century bond in a “road show” to potential buyers.  Mark and I scheduled this road show for the first week in July, flying out on Sunday evening to Boston to start bright and early Monday morning to meet one-on-one with investors.

Most of these investors are associated with life insurance companies, pension funds or other investment vehicles – and all are experienced and focused on delivering value to their customers.  We knew we had a challenge before us to sell a product with no precedent to investors who might not know us – for we had meetings with three investor categories who likely had not considered DC Water before: investors in taxable bonds, investors in century bonds, and investors in green bonds. 

Over three days, Mark and I held more than 20 one-on-one meetings with investors, and at times, groups of investors.  These meetings were set-up by our crack team from Goldman & Sachs and Barclay’s – joint “bookrunners.”  The term comes from the practice, now almost forgotten in the midst of time, of recording potential buy orders from green or blue buy slips in the “book” for the transaction.  Of course, this process is electronic now.   Goldman and Barclay’s have huge sales forces, working the phones and the internet to set up meetings with interested buyers.

Goldman, and sometimes Barclay, bankers accompanied us in every meeting with investors.  Early in the week, Jeff Scruggs, the amiable, experienced and wise lead for the Goldman municipal banking group, predicted that we were likely to go to the market with the offering the next week – but that there was a small chance we might go earlier.  That seemed a pretty remote chance at first. 

We presented our case.  With enthusiasm, thought and care –  over and over. We could feel the momentum start to build.  One or two meetings were difficult, but we did not falter – we scheduled follow-ups, responded to written questions, prepared further analysis as needed.  By the third day of the road show, we had investors seeking to schedule time with us.  The chance of an early sale increased.

Thursday early - with the mists rolling off the Hudson - dawned with anticipation.  We sat in the Goldman offices with financial data streaming over a huge screen.  We met with the Goldman syndicate desk – the folks who actually price the deal – and decided to go to market early.  Plus, unrest in the Middle East and a banking problem in Portugal had triggered a “global flight to quality” back into the  US treasury market.  More demand drives up the price of the treasuries – in the form of lower interest rates.  In the bond world, price and yield move in opposite directions!  So the higher the price of a bond, the lower its yield.  The rate we would set for our bonds is based on a “credit spread” above the US 30 year treasury rate.  We started our “price talk” with a credit spread of +155-160 basis points.  For those new to the field, each unit of interest rate has 100 basis points.  So 160 basis points meant 1 3/5% above the US 30 year rate.  We were hovering at or just above 5% for our bonds.

The rest of Thursday was exciting – like a sporting event.  Really!  The sales forces were contacting buyers, potential investors were indicating an interest of being in the book and at what amount, we were watching treasury interest rates by the minute – changes would drive the cost of the deal up or down substantially.  The sale is easier at a higher rate and we can guarantee the interest of investors.  But a lower rate would benefit our ratepayers.  We calculated that the present value (cost in today’s terms that are spread out throughout the transaction) of each basis point change in interest was approximately $600,000.  And remember, there are 100 basis points in every digit of interest.

Finally, in the early afternoon we concluded we had captured the peak of a wave of interest trends and buyer interest and closed the book.  The deal was spectacular, better than our highest expectations:
  1. DC Water received almost $1.1 billion dollars in orders for what was originally a $300 million dollar issuance – almost three times the offer.  This is a remarkable endorsement.  For sober and experienced investors, DC Water is considered a good investment over the time span of 100 years – for its corporate governance, financial management, and operational efficiency. Due to this demand, favorable market conditions, and an awareness of the work that is before us, we decided to increase the transaction by $50 million to $350 million.
  2. As noted, DC Water pays an interest rate that is calculated as a premium over the 30-year US treasury rate.  Of the few century bond issuers, all in the corporate sector or private universities, the range had been from 140 basis points at the low end to 180 basis points at the high end.  We started the day anticipating a 160 basis point “credit spread” over the 30-year benchmark.  By the end of the day, we had so many interested buyers that we were able to push down the interest rate by 15 basis points to +145 – equal to the best rates ever achieved for a century bond!  Each reduction of a basis point equals about $600,000 in savings for DC Water ratepayers in present value.  So 15 basis points saves us nearly $9 million!   This rate is also significantly lower than the rate we achieved last year for tax-exempt 35-year bonds, which is extraordinary.
  3. DC Water is fortunate to have investors that are new to our credit – from investors in century bonds, investors in taxable bonds, and investors in green bonds.  The green bond certification by itself generated almost $100 million in purchase orders. 
Wow, what a run!  We raised $350 million to finance a project that will yield the most significant water quality improvements to the rivers of the nation’s capital since Blue Plains was built.  We saved ratepayer dollars, introduced ourselves to new investors, and spread the cost of a 100 year project over the 100 years of ratepayers who will benefit.  We sold certified green bonds. 

Yet the most profound messages to me are not just about the sparkling financial attributes.  The first is that innovation can, should and must come from every aspect of the water industry.  I was fortunate to have the chance to recruit a CFO from outside our industry.  Yet Mark has brought a whirlwind of new ideas to DC Water, and in this case, was phenomenal in managing this complex transaction.   Second, is that only great teams succeed, for Mark was backed up by Bob Hunt and the entire CFO office, and key employees stepped forward when needed. Carlton Ray stepped up with risk information for a key investor to help win the day.  Sarah Neiderer was excellent in helping to shepherd us through the process of a green certification.  Third, DC Water and other authorities need the best financial advice available.  Dan Hartman and his team at Public Financial Management were absolutely essential and provided wise and steady advice throughout the process.

Finally, the deal is not done without the best investment banking firms.  Goldman Sachs and Barclays worked tirelessly to market this transaction to investors.  They are good at this – processes refined to a smooth and efficient outcome, managed I must say, by people who are open, friendly, helpful and engaged.  And, they know all the investors, and at the critical moment, helped close the deal.

DC Water ratepayers are the most important beneficiary of this innovative financing strategy.  DC Water benefits from stars like Mark Kim.  DC Water benefits from smarter financing that demonstrates our green credentials.

We have only just begun!

Washington, D.C., "Green" Bond Greeted With Strong Investor Demand - Wall Street Journal, July 10, 2014

D.C. Water Bonds Ride Best Long-Debt Gain Since '12: Muni Credit - Bloomberg, July 14, 2014

DC Water liquidates green century bonds - FierceEnergy, July 11, 2014