Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.
Speaker 1: Along with my co host Lisa Abramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg P and L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Roger McNamee,
Speaker 1: co founder Elevation Partners, also one of the leaders of
Speaker 1: the band Moon Alice, and he joins us here in
Speaker 1: our eleven three oh studios based in Menlo Park, California.
Speaker 1: Roger Pleasure, thanks for being here him. It is always
Speaker 1: fun to be on Bloomberg Radio. All right, are you
Speaker 1: addicted to the Internet. Well, I'm definitely addicted to social
Speaker 1: media and my smartphone. In fact, the realization of that
Speaker 1: fact was one of those incredibly disapp pointing things where
Speaker 1: I went, oh, my gosh, you know, I think of
Speaker 1: myself as self disciplined. I think of myself this being
Speaker 1: fitness oriented and ah. The realization that that this thing
Speaker 1: was controlling my life was not my finest heart. When
Speaker 1: when was this? Uh? And I should also note that
Speaker 1: you're you know, you've got an iPad it in your
Speaker 1: hands right now. I do, and in fact so I.
Speaker 1: I have spent thirty five years as an investor in
Speaker 1: the technology industry, and I've always been an early adopter,
Speaker 1: and I've always felt that technology was a thing, that
Speaker 1: it was a tool, but it was a tool that
Speaker 1: could make my life better in a lot of ways.
Speaker 1: And that has been consistently true. I mean, notwithstanding all
Speaker 1: of the aggravation. If you think thirty five years, you've
Speaker 1: gone back, that's the very beginning of personal computers. And
Speaker 1: God knows a lot of the products along the way
Speaker 1: have delivered less than than their initial promise. The challenge
Speaker 1: that we have with internet platforms on smart phones is that,
Speaker 1: for the first time, we have a device in a
Speaker 1: smartphone that can really deliver any kind of content more
Speaker 1: or less anywhere, Lucien, every moment that you're awake, and
Speaker 1: you know, like everyone else, I did not anticipate how
Speaker 1: that was going to change my life. I mean, the
Speaker 1: good parts were obvious immediately. The dark side became clear, only,
Speaker 1: shall we say, with a lag, and sadly that leg
Speaker 1: was well passed the point at which I was largely
Speaker 1: unable to modify my behavior. So, Roger, you are an
Speaker 1: early investor with both Google and Facebook, and you've been
Speaker 1: writing columns basically bashing them for the past years, so
Speaker 1: basically saying that Facebook and Google threatened public health and democracy.
Speaker 1: I invested early in Google and Facebook. Now they terrify me.
Speaker 1: Have you heard any response from me there of the company?
Speaker 1: I have not. And so the important thing to understand
Speaker 1: is that before I went public on this, I spent
Speaker 1: four months appealing to Facebook directly, starting with Mark Zuckerberg
Speaker 1: and Cheryl Sandberg and then working with other executives that
Speaker 1: they had delegated to deal with this, beginning in October
Speaker 1: before the election UH, and accelerating dramatically on November nine,
Speaker 1: where I tried for four months as a friend of
Speaker 1: the firm to persuade them that I thought that the
Speaker 1: things that we were seeing with respect to Brexit, with
Speaker 1: respect to the U S election, with respect to UM firm,
Speaker 1: financial firms using Facebook tools to discriminate in housing, UH,
Speaker 1: some of the things related to Black Lives Matter, some
Speaker 1: of things that were going on overseas, that I thought
Speaker 1: all of those things had a common route, which was
Speaker 1: to say that the business model of Facebook, the advertising
Speaker 1: business model and the way the algorithms were set up
Speaker 1: created um incentives for bad actors to use the platform,
Speaker 1: and that really terrified me. You know, I just have
Speaker 1: to say we did get Jana Partners and cal Stars,
Speaker 1: the second biggest public pension in the US coming out
Speaker 1: putting a letter out appealing as investors in Apple, appealing
Speaker 1: that they study the effect of iPhones on children. Apple responds,
Speaker 1: We're fine, We're good. We have the protections that we
Speaker 1: need and we're looking at it. I mean, since this
Speaker 1: behavior has gotten so rooted, is there any financial reason
Speaker 1: for Facebook, Google, or Apple to modify anything about their businesses?
Speaker 1: So that is a, I think a great question. Now
Speaker 1: I want to come a little bit to Apple's defense. Apple,
Speaker 1: as the the maker of the iPhone, has an unusual
Speaker 1: market power here, and to their credit, they've exercised that
Speaker 1: very constructively over the last year without any external stimuli.
Speaker 1: The most important thing they did was they've upgraded the
Speaker 1: operating systems over the last few months and they eliminated
Speaker 1: auto play in Internet applications. This is really important for
Speaker 1: video on the Internet, and they essentially made it impossible
Speaker 1: for Facebook and Netflix to have AutoPlay b the default thing,
Speaker 1: and that was a very consumer friendly thing. They've also
Speaker 1: been very good at enabling things like ad blockers and
Speaker 1: tracking blockers to protect your privacy. There's a lot more
Speaker 1: Apple can do, and I welcome shareholders taking a role here.
Speaker 1: I do think shareholder activism is going to matter a
Speaker 1: lot because I'm very concerned that there is no appetite
Speaker 1: for regulation of this in the United States. And realistically,
Speaker 1: we're so early in the process of educating consumers about
Speaker 1: what's going on that it's going to take years. And
Speaker 1: you know, we have an election coming up in November.
Speaker 1: There will for sure be massive attempts to manipulate, just
Speaker 1: as there were in probably coming from people both inside
Speaker 1: the US and outside, left right center, all over the place.
Speaker 1: I mean, essentially, the Russians showed you that you can
Speaker 1: use those tools to produce the outcome of your dreams.
Speaker 1: And we're going to see a lot of people try.
Speaker 1: Many of them will fail, but we're going to see
Speaker 1: a lot of people try. Because it is inherent in
Speaker 1: the design of Facebook that the way they talk about
Speaker 1: bringing people together, but in fact what the product does
Speaker 1: is it it polarizes. It basically tries to um in
Speaker 1: order to service its business models. Business models based on advertising.
Speaker 1: Advertising is based on engagement. Engagement is based on emotion.
Speaker 1: The emotions that cause the highest engagement are the ones
Speaker 1: we call the lizard brain emotions, things like fear and anger.
Speaker 1: And the problem with fear and anger, obviously, is that
Speaker 1: they're asymmetric, and people who want to do harm can
Speaker 1: use fear and anger a lot more effectively than people
Speaker 1: want to do good. And I first observed that during Brexit,
Speaker 1: So when the UK was voting whether to leave the
Speaker 1: European Union, there was the campaign to leave was based
Speaker 1: on two kind of outrageous emotional appeals. One they were
Speaker 1: going to take all the savings and bail out the
Speaker 1: National Health Service, and the one they really focused on
Speaker 1: was terrifying people about the role that immigrants were playing
Speaker 1: in the economy and in the culture. And the leave
Speaker 1: or Sorry the Remain campaign the other side, had a
Speaker 1: very sedate kind of, you know, stay the course, unemotional appeal.
Speaker 1: They were doomed. And we don't know exactly, but we
Speaker 1: suspect that the economic advantage to the leave campaign of
Speaker 1: using products like Facebook was roughly twenty to one. That is,
Speaker 1: if you had a negative you know, tear it down
Speaker 1: kind of thing. I think that appealed to anger and fear.
Speaker 1: You get roughly twenty times the reach for every dollar
Speaker 1: you invest, and that is a prohibitive advantage. And it's
Speaker 1: a symmetric. There is nothing that the people with the
Speaker 1: positive campaign can do because Facebook isn't structured to emphasize
Speaker 1: the positive, is structured to emphasize the negative. That's a choice.
Speaker 1: Real quick twenty seconds. Do you still own any steak
Speaker 1: in Google and Facebook? I do own a steak in
Speaker 1: Facebook because I'm trying to help them get this right.
Speaker 1: I want to work with them. But would you sell
Speaker 1: it if they didn't do it right eventually? Yes, of course,
Speaker 1: but I hold hope. I mean, I think these are
Speaker 1: smart people. I think they're good people. I don't think
Speaker 1: they intended to do this. Roger mcnameee, thank you so
Speaker 1: much for joining us. Always always a pleasure speaking with you.
Speaker 1: Roger McNamee is co founder of Elevation Partners in Menlo Park, California.
Speaker 1: He's also in a band, Muna Alice. He's got the
Speaker 1: callouses on his fingers to show it. We were going
Speaker 1: to ask him to freestyle and he was prepared, So
Speaker 1: maybe the rest of the show will be just that,
Speaker 1: thank you so much for joining us. Tesla the company
Speaker 1: that continues to defy calls for its demise. Tesla is
Speaker 1: burning through about a billion dollars of cash each quarter,
Speaker 1: and now it's having trouble meeting its goals with respect
Speaker 1: to production meeting it's probably going to have to raise
Speaker 1: more money. Here with us to talk about its debt
Speaker 1: profile and how it might meet its financing needs is
Speaker 1: Joel Levington, senior credit analyst for Bloomberg Intelligence who joins
Speaker 1: us at our eleven three oh studios. Joel, Tesla has
Speaker 1: already issued debt. It has fallen in price with yields
Speaker 1: rising since issue ends. What are its options at this
Speaker 1: point for raising money in the debt market? Sure, well,
Speaker 1: I think they have a few options. They've issued both
Speaker 1: senior unsecured notes. They can always go back to that market. UH.
Speaker 1: To me, I think they would be smarter to use
Speaker 1: a convertible instrument. They have several UH convertible bonds that
Speaker 1: are outstanding. Mainly because at this point in time, when
Speaker 1: cash flow is weak, to put on a fixed layer
Speaker 1: of interest EXPANSE on top of that UH really puts
Speaker 1: extra pressure on the on the P and L, and
Speaker 1: also on the balance sheet. So does this also include
Speaker 1: the depth that was incurred by the purchase of Solar City.
Speaker 1: That's exactly right. And one of the interesting things about
Speaker 1: how the rating agencies look at Tesla is that none
Speaker 1: of that Solar City debt is guaranteed, so essentially Tesla
Speaker 1: could walk away from it if they chose to. But
Speaker 1: the rating agencies included in all their calculations as if
Speaker 1: they would never walk away from it. Uh. I find
Speaker 1: that to be interesting simply because the Solar City bonds,
Speaker 1: like you get a twenty nineteen Solar City bond at
Speaker 1: about five and a half percent, not all that different
Speaker 1: than the seven year bond UH the Tesla bond that
Speaker 1: is in the index, So clearly there's some liquidity there,
Speaker 1: but you're also cutting down your term risk by about
Speaker 1: seven years. So I'm looking right now at Tesla bonds,
Speaker 1: the ones that are due in August, currently yielding about
Speaker 1: six percent, priced under don any six cents on the
Speaker 1: dollar on the dollar, and I have to wonder, um,
Speaker 1: this is well below other companies in the high yeal
Speaker 1: bond market as far as the price goes higher yield
Speaker 1: UM our bon us is going to buy this. I mean, honestly,
Speaker 1: Tesla has not proven that they can be profitable or
Speaker 1: come through on its promises. Right, Well, investors will buy
Speaker 1: it because they did buy it. They did buy it,
Speaker 1: and they they punished for it, and they haven't punished
Speaker 1: for it. I think the thing is is that you
Speaker 1: know that the company is very polarizing. People either feel
Speaker 1: very strongly that it's gonna change the world and you know,
Speaker 1: like that would be great if it doesn't. Other people
Speaker 1: feel like it's miserable and will never achieve its goals,
Speaker 1: and a senior unsecured piece of paper doesn't really work
Speaker 1: for either of those cases. If you are feeling strong
Speaker 1: about the company, that's a place where you're saying, I
Speaker 1: should be bullish and that like look to clip a
Speaker 1: five point three percent coupon. I should be in the equity.
Speaker 1: If you feel very against the company, then there then
Speaker 1: you wouldn't be in the bonds or the or the equity. Right.
Speaker 1: So basically you're getting none of the upside with the
Speaker 1: bond and all of the downside risk with the senior
Speaker 1: unsecured bond, whereas convertible you kind of are mixing the two,
Speaker 1: you're giving them financing. You're not diluding shareholders, but you're
Speaker 1: also getting some steak in the potential upside um. So
Speaker 1: you're saying that it's likely or it would be appropriate
Speaker 1: for Tesla to look at convertible bonds for financing. Does
Speaker 1: this mean that the unsecured bond market is I don't
Speaker 1: want to say close to them, but only available to
Speaker 1: them if they're willing to pay up a lot more
Speaker 1: than they did last time around. Right, well, as you
Speaker 1: as you can see now that their bonds are you know,
Speaker 1: somewhere about five and three quarters to six percent, so
Speaker 1: they could issue new bonds. I don't think that would
Speaker 1: be a problem issuing more unsecured bonds if they wanted to.
Speaker 1: I just think strategically it doesn't make a lot of
Speaker 1: sense to go that route, especially when you're equity price
Speaker 1: is so high. Now is the time to you know,
Speaker 1: like worry about getting your business operations together as opposed
Speaker 1: to layer layering in additional financial risk through an unsecured issue.
Speaker 1: I understand that they've got what about four hundred and
Speaker 1: eighteen million that in bond principle that is due this year.
Speaker 1: That's right, and at least based on my math, it
Speaker 1: looks like they'll be free cash flow negative by about
Speaker 1: a billion eight. So, you know, like if they went
Speaker 1: back to the market for somewhere between two and two
Speaker 1: and a half billion dollars this year, I wouldn't be unsurprised. Wait,
Speaker 1: just back up. So in other words, they're going to
Speaker 1: be negative. They're going to earn negative one point eight
Speaker 1: billion dollars this year. In other words, their their capital
Speaker 1: expenditure should be somewhere in the three three three point
Speaker 1: two billion dollars, or their cash flow should be you know,
Speaker 1: about a billion four. So that would give you about
Speaker 1: negative a billion eight, which is not that surprising for
Speaker 1: a company that's in a rapid growth mode. But companies
Speaker 1: in rapid growth modes really shouldn't be playing with unsecured
Speaker 1: debt or or you know, and in either case, whether
Speaker 1: you go to a senior secured piece of paper that
Speaker 1: will prime your bond that's outstanding that's in the Bloomberg
Speaker 1: Barkley's index, or alternatively, if you're doing more converts, uh,
Speaker 1: you know, like that would be a kind of along
Speaker 1: the lines where you're getting a lower coupon issue. If
Speaker 1: TESLA lower to issue a two point two billion dollar
Speaker 1: convertible bond offering. That would be a massive, massive convertible issuance.
Speaker 1: Do you anticipate that they could do the whole thing
Speaker 1: in the convertible bond? They might, And you know, I
Speaker 1: would say that's something that's interesting if you look back
Speaker 1: at the past issue once as the stock has actually
Speaker 1: gone up when they've issued convertible debt, the stock has
Speaker 1: actually gone up because there's the liquidity fear that's in there.
Speaker 1: That's that's bakeing into Tesla. Right, it's a it's a
Speaker 1: very hit or hit or miss. You're either going to
Speaker 1: have a moon shot and it's going to be unbelievably awesome,
Speaker 1: or you have a heavy financial risk so that the
Speaker 1: stock market is actually approved of them issuing converts. Well,
Speaker 1: I mean liquidity risk saying basically, they're burning through cash.
Speaker 1: They're not gonna be able to keep in business if
Speaker 1: they can't raise money. So if they and raise money
Speaker 1: without diluting shareholders and without incurring huge interest payments, that's
Speaker 1: a good thing. That's true. Well, there you go. I
Speaker 1: don't know where to go with this except that they're
Speaker 1: going to have to raise some money pretty quickly, I
Speaker 1: would think. So, you know, if what's the clock on
Speaker 1: this four and eighteen million repayment, Well, the four eighteen
Speaker 1: million dollars shouldn't be that troubling to them. They do.
Speaker 1: They did have three and a half billion dollars of
Speaker 1: cash on the on the balance sheet September. It's really
Speaker 1: more of you know, like, if I'm thinking more strategically
Speaker 1: out for a couple of years, how do I need
Speaker 1: to finance this company until it moves going from a
Speaker 1: cash user, a high growth company, cash burner, into more
Speaker 1: of a cash cow. They kind of get that model
Speaker 1: three out there in the public. Thanks very much for
Speaker 1: joining us. Joel Levington is our senior credit analyst for
Speaker 1: Bloomberg Intelligence telling us all about Tesla. We consult Ira
Speaker 1: Jersey are interest rate strategist for Bloomberg Intelligence for details
Speaker 1: about the economy and interest rates. Ira. I want you
Speaker 1: to begin, if you can, all the way at the
Speaker 1: back end of your latest report, because I found it
Speaker 1: very interesting about household growth in the United States and
Speaker 1: if you could enlighten us a little bit about what
Speaker 1: has happened to household growth and who's actually living at home. Yeah,
Speaker 1: so household growth has been very slow since the sense
Speaker 1: of global financial crisis a couple of almost a decade
Speaker 1: ago now and um and one of the big reasons
Speaker 1: for that. So so we always focus on retirees, and
Speaker 1: we know that there's an aging population in general, but
Speaker 1: that's not necessarily what's holding household growth back. What's holding
Speaker 1: household growth back is young workers. That these are people
Speaker 1: to thirty four who are living at home in the
Speaker 1: greatest numbers ever. And also as a percentage of that
Speaker 1: age group, Uh, it's now six of that age group
Speaker 1: living at home, when it used to be and historically
Speaker 1: between eight and eleven percent. So you're talking about more
Speaker 1: young workers living at home and that has major impacts
Speaker 1: on the economy because these folks aren't buying houses, they're
Speaker 1: not renting apartments, they're not buying refrigerators, they're not getting
Speaker 1: household services. They're basically using the household services um for
Speaker 1: for their parents at their parents house. So so that
Speaker 1: is a constraint on growth right now. And you know
Speaker 1: that's kind of this fiscal situation. That's the kind of
Speaker 1: thing monetary policy can't fix. So ira, can you bring
Speaker 1: that sort of reality into into the market right now
Speaker 1: and what we're seeing with ten uere yields trying to
Speaker 1: break out of this two point six threshold that a
Speaker 1: lot of people say is sort of the tipping point.
Speaker 1: How does this relate, Well, it's not necessarily relating to
Speaker 1: you know, the mood that we're seeing today, or some
Speaker 1: of the um UH or or some of the kind
Speaker 1: of day to day moves. But I think it shows
Speaker 1: that one of the reasons why inflation has been and
Speaker 1: continues to be a bit lower than um people would
Speaker 1: like it to be. It's just that there's a various
Speaker 1: socio economic and demographic factors that are driving inflation to
Speaker 1: be somewhat lower. Now that being said, when you look
Speaker 1: at things like what's going on with oil prices recently
Speaker 1: UM and how high they're going, that's increased helping increase
Speaker 1: inflation expectations at least at the headline level, even even
Speaker 1: if core inflation isn't necessarily going up. So you look
Speaker 1: at what's happened, UM just in the last couple of months,
Speaker 1: the last couple of weeks, I should say, and you've
Speaker 1: seen a good you know, ten basis point move in
Speaker 1: things like five year inflation break even so so the
Speaker 1: Marcus expectation of what inflation is going to average over
Speaker 1: the next five years, and that's coincided quite closely with
Speaker 1: the uptick and oil prices. So I think that's a
Speaker 1: that's one of the several drivers of yields in the
Speaker 1: near term. So the idea that there are all of
Speaker 1: these younger people living at home, is there any evidence
Speaker 1: out there that anything would push them out of their
Speaker 1: parents basements and into their own homes or is it
Speaker 1: just going to be a new a new reality. Yeah,
Speaker 1: that's a good question. UM. I think for that for
Speaker 1: the time being, it has to be. It's probably a
Speaker 1: new reality. I think part of it ends up being
Speaker 1: what happens when, um, you do get more retirees actually
Speaker 1: retiring and creating new new jobs. I think wage pressures
Speaker 1: and wage growth has to pick up. I think once
Speaker 1: you see a significant amount of wage growth, UM, you
Speaker 1: can wind up seeing, um, some of these people move
Speaker 1: out of their their parents homes. I think a big
Speaker 1: part of it is is that that age group now
Speaker 1: as a as a share of income compared to people
Speaker 1: twenty years older than them, their wages are lower than
Speaker 1: they have been UM historically speaking. So I think that
Speaker 1: has to catch up, So it's kind of this distribution
Speaker 1: of of of wages, if you will, that winds up
Speaker 1: mattering somewhat, I think for the market today, though, you know,
Speaker 1: we're looking at things like monetary policy overseas, so things
Speaker 1: like the Bank of Japan hinting that might scale back
Speaker 1: their purchases. UH. The e c B we know is
Speaker 1: Star is already starting to um to buy less bonds
Speaker 1: out there, and that's a non trivial reason why we
Speaker 1: we're seeing some of today's market action with you know,
Speaker 1: thirty year yields back up six basis points, which is
Speaker 1: a relatively substantial moves these days. So if if a
Speaker 1: client were to call and say, why is there this
Speaker 1: big sell off at the long end, why are we
Speaker 1: down one and eight thirty seconds? What's up at that
Speaker 1: two point eight seven yield on the thirty year, what's
Speaker 1: your answer? Yeah, that's all about the the Bank of
Speaker 1: Japan action firstly, and then secondly, just um, you know,
Speaker 1: we we saw the most recent take ups and the
Speaker 1: last two basis points in um in yield moves higher
Speaker 1: after we got the Jolts job opening report at UH
Speaker 1: just a couple of minutes ago, and that showed that
Speaker 1: labor market tightness seems to still be uh still be
Speaker 1: the case. So you have, you know, between monetary policy actions,
Speaker 1: so basically less bond buying globally by central banks, and
Speaker 1: then on top of that an economy that at worst
Speaker 1: is in a steady state of of modest improvement. All
Speaker 1: of those things should lead for to somewhat better some
Speaker 1: of better inflation and UH and growth outcomes, and that
Speaker 1: should mean somewhat higher yields. I think one of the
Speaker 1: things that's that's not likely to persist is the curve stepening,
Speaker 1: because I do think that eventually the Federal reserve um
Speaker 1: if if this continues and we start to get higher inflation,
Speaker 1: the Federal reserve will actually um meet the dot plot,
Speaker 1: which the market isn't yet pricing. And because of that,
Speaker 1: you wind up with with today's stepening probably being on wound,
Speaker 1: and actually additional flattening to two occur later in the year.
Speaker 1: In other words, we're going to get faster rate hikes
Speaker 1: in response. Yeah, well, faster rate hikes than the market
Speaker 1: is currently pricing. The market is still only pricing about
Speaker 1: two rate hikes, and the Fed still thinks that they're
Speaker 1: going to go three. So if the FED worre to
Speaker 1: go three um, that would mean that that the market
Speaker 1: would have to catch up to the FED. Jersey thank
Speaker 1: you so much for joining us. Always a pleasure speaking
Speaker 1: with you. Jersey is chief US interest rate strategist for
Speaker 1: Bloomberg Intelligence. Now that Congress has passed a tax bill,
Speaker 1: are they going to move on to infrastructure and what
Speaker 1: is needed with respect to the infrastructure of the United States.
Speaker 1: Here to talk about that with us is Susan's Story,
Speaker 1: President and chief executive officer of American Waterworks Company, which
Speaker 1: is based in for Key, New Jersey. It is the
Speaker 1: largest publicly traded water utility in the country. Susan, thank
Speaker 1: you so much for joining us. I just want to
Speaker 1: start with asking you about the tax plan. UM. I
Speaker 1: know that you had noted that the extra money that
Speaker 1: you get you will put back into your infrastructure. Do
Speaker 1: you view this as possibly being a little bit of
Speaker 1: an infrastructure plan in the fact that you get more money. Well,
Speaker 1: thank you, Lisa, first of all for the invitation to participate,
Speaker 1: and absolutely the interesting thing for regulated utilities is that
Speaker 1: this tax cuts and Job Acts actually is an infrastructure plan.
Speaker 1: And let me explain that just quickly. In the regulatory environment.
Speaker 1: Whenever we pay taxes, if it's prudently incurred, we get
Speaker 1: a pass through to customers dollar for dollar. So the
Speaker 1: less taxes we pay, the more money then that goes
Speaker 1: back to our customers, the less they have to pay.
Speaker 1: So for every dollar of O and M we saved,
Speaker 1: like taxes or interest, we get to put eight dollars
Speaker 1: of infrastructure in the ground at no impact on the
Speaker 1: customer bills. So when you have decades needs of capital
Speaker 1: and you have a situation where you can take those
Speaker 1: O M dollars and translate those into capital investment, it's
Speaker 1: good for everybody. Um, susan story, And what if you
Speaker 1: could just give us an update on any of the
Speaker 1: active rate cases that you are currently involved And I
Speaker 1: know that at least you were focused on Pennsylvania, New
Speaker 1: Jersey and Missouri. Maybe just give us an update if
Speaker 1: you can. Yes, sure, So Pennsylvania was resolved at the
Speaker 1: end of we are currently in rate cases in New
Speaker 1: Jersey and Missouri and looking to hopefully have those resolved
Speaker 1: this year. And will that effect or is that part
Speaker 1: of your five year strategic plan? I understand that you're
Speaker 1: going to be spending about eight billion dollars. So our
Speaker 1: capital plan is based on the needs of the business,
Speaker 1: and in many of our states we have what's called
Speaker 1: future test years where they look at the capital plans
Speaker 1: up front. But as long as we can show that
Speaker 1: we need to make this investment, which we do. You know,
Speaker 1: in this country, of water pipe is near the end
Speaker 1: of life. Now, our replacement rate is about twice as
Speaker 1: good as a national average. But even we are at
Speaker 1: a replacement of equal to every one d and twenty years.
Speaker 1: So when it comes to pipes, plants, pumps, and cyber
Speaker 1: there's a tremendous need for capital investment, and this tax
Speaker 1: act is going to allow was to do more of
Speaker 1: that while keeping the customer bills low. Susan, what would
Speaker 1: you say to people who say that the tax plan
Speaker 1: as drafted, the fact that it will likely add trillions
Speaker 1: of dollars to the deficit, or more than a trillion
Speaker 1: dollars I should say, to the deficit over the next
Speaker 1: ten years, that that actually reduces the chance that Congress
Speaker 1: is going to pass or or really make progress on
Speaker 1: a real, true infrastructure bill. Are you concerned about that?
Speaker 1: Do you feel like this is maybe one step forward,
Speaker 1: two steps back? You know that that's a great question, Lisa,
Speaker 1: and I think that you know, I've mentioned for regulated
Speaker 1: utilities that they're wanting the same. I do think for
Speaker 1: the country that we need an infrastructure package that fully
Speaker 1: leverages private investment and also partners with public entities. And
Speaker 1: one of the things Price waterhouse Coopers looked at just
Speaker 1: the water utility industry, and what they found is if
Speaker 1: you look at public water, which is of all water,
Speaker 1: for example, that if that we could, by doing some
Speaker 1: simple stuff, unleash forty three to sixty three billion dollars
Speaker 1: in private money, and that if under Wastewater fifteen. And
Speaker 1: these are things like when a municipality decides to sell
Speaker 1: a system, if they have any tax um uh bonds
Speaker 1: that were tax exempt, they have to pay those off
Speaker 1: before they can sell their system. They can't even keep those.
Speaker 1: So there's certain things that we think an infrastructure bill
Speaker 1: can contain that will further leverage private money and not
Speaker 1: require that the federal government fund the entire cost. But
Speaker 1: now you concerned that the prospects for that kind of
Speaker 1: bill are getting dimmer given the passage of the tax legislation.
Speaker 1: I think it's going to be interesting. Given your comment
Speaker 1: about the projections for the deficit and how that will
Speaker 1: play out. I do know, however, that both sides of
Speaker 1: the I'll understand that we have an infrastructure problem in
Speaker 1: this country. I think how what the solutions look like
Speaker 1: will be impacted by that. But I hope for the
Speaker 1: sake of the country that we can come together and
Speaker 1: do something to incentivize the construction of more roads and
Speaker 1: bridges and the replacement of water and wastewater and other
Speaker 1: infrastructure that we so desperately need for the economy. One
Speaker 1: of the big winds I think for your company was
Speaker 1: the Right Patterson Base Air Force Base UH to take
Speaker 1: over their their water, wastewater and the water facilities. How
Speaker 1: long does it usually take after a contract when for
Speaker 1: any changes in rates or predetermination of rates to take
Speaker 1: place PM That's a great question. So with Right Patterson UM,
Speaker 1: we are projected to take over operations in July of
Speaker 1: this year, so typically after two years. As you just said,
Speaker 1: there's price redeterminations that if there are changes in laws,
Speaker 1: that if for example, if there's an environmental law that
Speaker 1: requires more costs, we can increase the amount of O
Speaker 1: and M. The tag changes will eventually over the life
Speaker 1: of these price reydeterminations bring those costs down, but that
Speaker 1: will allow us to do more capital upgrades on the
Speaker 1: military basis that we serve all thirteen of them across
Speaker 1: the country. And just further, if you could speak about
Speaker 1: some of the natural disasters that the country has has
Speaker 1: been hit by in the last twelve months. You've been
Speaker 1: affected not only in California, but in Louisiana and other
Speaker 1: areas of the country. Give us an update if you can.
Speaker 1: That's exactly right. We are spread across the entire country,
Speaker 1: so typically when there's a natural disaster, it affects either
Speaker 1: our regulated business or our market based business. Our focus
Speaker 1: is on building resilience systems that can withstand hurricanes, ice storms, flooding,
Speaker 1: the fires in California, for example. So part of that
Speaker 1: infrastructure investment is on resiliency if critical assets. We've identified
Speaker 1: fifty critical assets that serve eight percent of our country,
Speaker 1: our customers across the country, and we have a plan
Speaker 1: to ensure that we build resiliency. For example, a floodwall
Speaker 1: in a water plant in New Jersey that serves a
Speaker 1: million people. We've just finished a sixty five million dollar
Speaker 1: project that we're protected against a five hundred year flood
Speaker 1: because we had three one hundred year floods in the
Speaker 1: period of seven years. So the issue of resiliency of
Speaker 1: our system is a critical one and again a reason
Speaker 1: that we have to get serious about infrastructure investment in
Speaker 1: this country. Just real quick, Susan. When when analysts come
Speaker 1: on our investors who invest in the stock market come
Speaker 1: on our show, they always talk about utilities as being
Speaker 1: a bond proxy, and utilities are falling now in the
Speaker 1: stock market is a response to falling bond prices rising yields?
Speaker 1: Does that frustrate you? We know, it's interesting and and
Speaker 1: we did fall in eight k in December. That said,
Speaker 1: because we had offered guidance on December eleventh that we
Speaker 1: need to re look at everything that the Tax Act
Speaker 1: will do to make sure that we you know, UM
Speaker 1: can at our year end call a firm not a firm,
Speaker 1: or any changes we need to. But with that said,
Speaker 1: in the past, you know, we've enjoyed an EPs growth
Speaker 1: of seven to ten percent, and we have had a
Speaker 1: dividend yield and a dividend increase that's been above ten
Speaker 1: um over a keger over the past five years. So
Speaker 1: when you talk about a bond proxy. You're talking about
Speaker 1: a return that equivocates a bond and at list for
Speaker 1: American Water, we don't fit that profile. Thank you very
Speaker 1: much for being with us. Susan Story is the chief
Speaker 1: executive of American Water. Thanks for listening to the Bloomberg
Speaker 1: p m L podcast. You can subscribe and listen to
Speaker 1: interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
Speaker 1: You can always catch us worldwide on Bloomberg Radio