1. Water Partnerships
Provide Investment
Capital and Debt Relief
in Bayonne, N.J.
Sustainable City Network
Dan Sugarman
December 11, 2012
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2. SUEZ ENVIRONNEMENT, a Global Leader
! One of the two world leaders ! 2011 revenues: €14.83bn
in environment ! 2011 EBITDA: €2.51bn
! Technology and sustainable ! 80,410 employees
development focus
Water Waste
! 1,888 drinking water production units ! Over 400,000 industrial and commercial
managed, 91 million people supplied customers
! 1,643 wastewater plants managed, ! 57 million people benefiting from waste
63 million people served for water services
sanitation
! 42 million tons of waste treated
! 1 billion inhabitants served by water
! 47 incinerators worldwide (of which 46 with
treatment plants engineered by
energy recovery capability)
SUEZ Environnement / Degrémont
2
3. Introduction to United Water and
SUEZ ENVIRONNEMENT NORTH AMERICA
# 2 water player in 2012
§ 3 Business Lines (Regulated,
Environmental Services, Utility
Service) under 2 local brands
§ 2,600 employees
§ 7 million population served
§ Operating in 41 states
# 1 water player in 2012
§ 50/50 partnership with Peñoles
§ 1,000 employees
§ 5 million population served
Developing presence
§ 3 water contracts
§ 2 solid waste O&M contracts
§ 200 employees
3
4. SENA - Organized to Meet
U.S. Market Needs
Transfer
Ownership
Lease System
for Upfront
Payment
Design
Build Operate
Outsource
Value Provided
Operations
&/or CPM
Management
Services
Asset Packaged
&/or Services
Capital Tank United Water
Improvement Management
Delivery
Equipment
Purchases
Do Nothing
Political difficulty
4
5. United Water Today
¢ Traditional Water and Wastewater Services
– Approximately 5.7 million people served in 21 states
– 18 Regulated Utilities
– 100 Contract Operations
¢ 2,300 employees
¢ $3.0 billion in total assets
¢ $800 million in revenues
5
6. Introduction to KKR
Established in 1976, Kohlberg Kravis Roberts & Co. L.P. (“KKR”) is a leading global investment firm
with industry-leading investment experience, in-depth industry knowledge, sophisticated processes for
growing and improving businesses, and a strong culture committed to teamwork
è Leading investment firm
Private Equity, Infrastructure & Natural Resources,
Assets Under Management
Credit & Mezzanine, Public Equity
As of December 31, 2011
è Global presence ($ in billions)
Offices in 14 major cities in 9 countries across 4 continents
è “One-firm” culture that evolves, learns, and innovates
Adaptive to change
$15.4
è Relationship-driven approach
Sourcing investment opportunities
Partnering with clients $43.6
è Aligned with our partners
“Eat our own cooking”
Economic incentives driven by results
Private Equity Credit
Focused on managing stakeholder interests
6
7. Introduction to the City of Bayonne
City of Bayonne Location
§ The city of Bayonne is located in Hudson
County, New Jersey and lies in the heart of
the Port of New York and New Jersey
§ Bayonne is situated east of Newark, the
state's largest city, west of Brooklyn, shares
a land border with Jersey City to the north
and is connected to Staten Island by the
Bayonne Bridge
§ Traditional manufacturing, distribution,
healthcare and maritime activities remain
important to the economy of the city
Key Statistics
Mayor Mark Smith (term ends May 2014)
Population 63,024(1)
Area (Land) 5.80 square miles
Density 10,858.7 persons per square mile
Unemployment Rate 11.5%(2)
(1) 2010 Census Data
(2) Seasonally unadjusted unemployment rate as of March 2012
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8. Introduction to the City of Bayonne
Key Economic Themes
§ Future port development projects include a 50 foot deepening at Port Jersey, a multi-million container terminal
Port Activity and Development expansion by GCT at Port Jersey, the development by PANYNJ of a container terminal at the Peninsula, and
Should Provide Employment the development of the Greenville rail yard
and Economic Stability § Capital investments in the port area between 2012 and 2017 are expected to create an additional 41,300 total
jobs across the region, more than $2 billion in personal income and more than $4.4 billion in business income
§ The Bayonne Medical Center is one of the largest employers in Bayonne, employing over 1,800 people
Stable Central Business § The Central Business District is the primary retail area of the City and includes over 270 businesses located
District in Bayonne Anchored directly on Broadway
by a Large Medical Center § In September 2002 the City was designated an Urban Enterprise Zone, offering participating businesses
many incentives to encourage business growth and stimulate local economies
Manufacturing and § Manufacturing and distribution have historically been the largest contributor to the Bayonne economy
Distribution Still Remain Key § A number of large manufacturers and distributors are located in Bayonne, including Haddad and Jerhel
Industries with Healthy - The development plans for Bayonne’s ports and railways will only increase the number of manufacturers
Prospects for Growth and distributors
Median Household Incomes § The median household income in Bayonne has historically been higher than the national median
Are Much Higher than National
Averages - The 2010 median household income for Bayonne was approximately 12% higher than the national median
§ Located across the bay from New York City, Bayonne is situated to benefit from the strength of New York’s
economy
Proximity to New York will
- Because of its convenient location, many workers commute daily to New York and surrounding area
Ensure Long Term Viability
§ The Bayonne Bridge is an important connection between Staten Island and the commercial and industrial
districts in Bayonne
§ The City lies at the heart of the Port of New York and New Jersey, east of Newark, and shares a land border
Economies of Neighboring with Jersey City to the north
Counties and Communities - Newark is the largest city in New Jersey and one of the nation's major air, shipping, and rail hubs
Remain Strong - Jersey City is an important transportation terminus and distribution and manufacturing center for the Port
of New York and New Jersey
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9. Bayonne Municipal Utilities Authority (BMUA)
Overview Key Individuals
§ The Bayonne Municipal Utilities Authority was created by Individual Position
virtue of an ordinance adopted October 9, 1997 by the
City Council and the City of Bayonne Sam Maggio Chairman
§ It is a public body, corporate and politic, organized under Olivia Klim Treasurer
the State of New Jersey Father John Fencik Secretary
§ Authority was created for the purpose of acquiring, Hon. Gary La Pelusa, Sr. Commissioner
constructing, maintaining and operating facilities for the
Thomas Jacobson Commissioner
treatment, purification and disposal of sewage and other
wastes originating in the City of Bayonne Hon. Debra Czerwienski Commissioner
§ The Authority is also responsible for operating, Michael Furmaniak (Resigned) Alternate
maintaining and managing the City’s water system [Open] Alternate
§ Prior to the creation of the Authority, the City operated
Stephen Gallo Executive Director
the system as a combined utility within the City’s budget
Joseph Nichols General Counsel
§ The Authority’s governing body consists of five
members, and two alternates, appointed by the Major of McManimon, Scotland & Baumann Bond Counsel
the City Bank of New York Mellon Trustee
- Members are appointed for a term of 5 years
Rate History (per 100CF)
Key Statistics
Year Water Rate(1) Sewer Rate
Description Amount 2011 4.29 3.50
Number of Employees 33 2006 2.45 2.90
Number of Service Connections ~12,000 2005 2.21 2.06
Daily Average Flow (Millions of Gallons) 8.5 2004 2.21 2.06
Maximum Daily Capacity (Millions of Gallons) 17.6 2003 1.85 2.00
(1) Rate for the first 110 CF per quarter
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10. System Overview
Water System Overview
Description Location
§ The BMUA owns and operates a water 1 Reservoir
transmission aqueduct and distribution
system that serves the City
2
§ The aqueduct transfers water from the North
Jersey District Water Supply Commission’s
(“NJDWSC”) Wanaque and Monksville
reservoirs, both of which are located in NJDWSC
Aqueduct
Passaic County Kearny
Pipeline
§ The BMUA has an allotment of 10.5 million
gallons per day (“MGD”) from NJDWSC, of
which an average of 8.5 MGD is used
3
4
§ The distribution system exceeds 96 miles of
Authority
mains including valves, fire hydrants and Aqueduct
other appurtenances
§ It is purely a distribution and metering
system, with no pumping, storage or 5
treatment required under the Contract
1 Monksville Reservoir 4 Kearny Water Distribution System
2 Wanaque Reservoir 5 City of Bayonne
3 Belleville
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11. System Overview
Wastewater System Overview
Description Location
§ The City's combined sanitary/storm sewer system
is owned by the BMUA
§ Wastewater flows are collected on the west side of
the City and pumped to an East Side Interceptor
Sewer
- This interceptor collects all flows conveys them
to the Oak Street Pumping Station which then
pumps the flows to the Passaic Valley Sewerage
Commission (“PVSC”) by a force main
PVSC
- The Contract does not call for the treatment of Facility
this sewage, as this remains as a responsibility
of the PVSC
Force Main
§ Total system capacity is 17.6 MGD, which is the 2
maximum amount of flow that can be transmitted
to PVSC for treatment due to hydraulic capacity of
the force main 1
- The wastewater pumps have the capacity to 1 City of Bayonne
pump up to 40MGD during wet weather events 2 PVSC Water Pollution Control Facility (Newark)
- The average daily flow-Dry Weather Flow
pumped to PVSC for treatment is approximately
8.3 MGD
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12. Bayonne MUA Challenges & Objectives
o Deeply Leveraged, i.e. Beyond ¢ Guaranteed capital improvements
Underlying Value of Assets and recovery from years of deferred
investment
o History of Deferred Investment in
System Assets ¢ Built-in mechanisms for capital
improvements without typical
politicized maintenance vs. capital
disagreements
¢ Improvement in asset condition and
customer service
¢ Strengthen balance sheet and leave
the Authority debt free
o Credit Quality Problems ¢ Long-term rate predictability
o Beyond Water and
o Wastewater System ¢ Qualified staff, bench strength, and
o Funding Requirements training programs
o Difficulty Attracting & Retaining ¢ Triple bottom line approach to
Qualified Staff managing utility
12
13. Choosing a Contract Model to
Meet the BMUA’s Objectives
You want world-class know-how
provided in an integrated manner Specialized Services
to solve your operational needs
You want to keep responsibility
for operation AND benefit from Management Contract
expertise of the private sector
You want to share responsibility
for managing your utility and pay
a fixed fee, combined with an Alliance Partnering
incentive for performance Contract
You want to delegate full
responsibility for operation O&M Outsourcing
Contract
You want reliable operation
coupled with funding of future
capital needs & refinancing of
United Water’s Solution
City’s debt to improve credit
13
15. BMUA Transaction Overview
Organizational Structure – 4 Key Agreements are Foundation of Transaction
Bayonne Municipal Utilities Authority
NJDWSC (Water
Direct Agreement Supply)
1. BMUA
Upfront Payment
Agreement
Senior Secured Notes due PVSC (Wastewater
2037 Treatment)
3.NPA* Bayonne Water Joint Venture, LLC
4. Joint Venture Agreement
Revolving Credit Facility
(2) Bayonne Energy
Center Supply
2. O&M
O&M Fee
Equity Agreement
Utilities (Wind Turbine
United Water Operations Contracts, O&M)
Consortium
Inc
Pass Through
Contracts
*Note Purchase Agreement
Capital Projects (as
requiring 3rd Party Due Diligence required)
to support Debt Rating
15
16. BMUA Agreement:
Revenue Requirement Overview
§ ~3.50% from 2015 -2021
§ 3.75% per year thereafter
§ Initial based year 2011 revenue has
been set at $20,639,000 as per the
BMUA Agreement
$19.4 mm 2015 - 2052
2015 Fixed
Rate Freeze Period Revenue
$20.6 mm 2013 - 2014 $26.3 mm
2011 Revenue 2015 Revenue 2015 Inflation Linked
Revenue
§ For the period covering 2013-2014 $6.9 mm 2015 - 2052
rates will be fixed
§ Rates will increase by 8.5% initially and
then remain flat in 2013 and 2014, and § 20% at the Labor Adjustment Index plus (i)
grow at 3.5% in 2015 1.00% per year during 2015 to 2021 and
(ii) 1.25% per year thereafter
§ 10% at the Standard Adjustment Index plus
(i) 1.00% per year during 2015 to 2021 and
(ii) 1.25% per year thereafter
16
17. BMUA Agreement:
Revenue Requirement Adjustment Events
nue
Actual Reve
True-up
m
ment Mechanis
nue Require
Defined Reve
Usage Capex
§ Replacement of water meters is expected to result in § United takes the risk on increased cost of the
additional meter usage Base Capex Program
§ In the event this does not materialize, rates will be § If Incremental Capex exceeds an agreed
adjusted to maintain the Revenue Requirement threshold, this will result in a rate increase
Development Operating Cost
§ Development of Bayonne is expected to result in § Certain operating costs are to be compared to a
incremental customer growth baseline (Pass-Through Expense Baseline)
§ In the event this does not materialize, rates will be § Any expenditures incurred on these items above
adjusted to maintain the Revenue Requirement the base line will result in a rate increase
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18. Risk Allocation
Revenue
§ No volume risk due to contracted Revenue Requirement set out for the term of the BMUA Agreement
§ A rate adjustment mechanism will be applied to ensure the defined Revenue Requirement is maintained
Underperformance of Revenue
§ Such rate adjustments will occur annually and will be bi-directional
§ Issuer is not dependent upon regulatory approval for rate base adjustments typical of a regulated utility
Rate Increases to Unsustainable § Water rates are comparable to other municipalities and sewer rates are considerably lower
Levels § Rate growth stipulated in the BMUA Agreement is below the historical rate growth in NJ
§ Customer growth in New Jersey has grown steadily over the past 40 years and are expected to show even
higher levels of growth in Bayonne from various developments in the region
Usage Risk
§ In the event that usage actually decreases, there are contractually protected rate adjustments to ensure
payment to the Joint Venture according to the Revenue Requirement
§ 93% of customers are residential and spread over 11,000+ accounts, limiting counterparty risk
Counterparty Risk § Residents of Bayonne are relatively affluent, with a median household income 12% greater than the
national average
§ Collections are expected to increase from the installation of the new metering system
Collections Risk
§ Secured by the BMUA’s obligation to remit proceeds of annual lien sales for unpaid bills
Supply Risk § Quantity and quality of water supply is guaranteed by the Authority
Inflation § 30% of revenue is inflation linked which provides alignment between revenues and costs
18
19. Risk Allocation (Continued)
Costs
§ United assumes the risk of increased costs of the Base Capex program
Capex Increases
§ Any divergence in ongoing capex from the agreed upon threshold results in a true up in the following year
§ Costs are either pass-through to rate payers, covered by United under a fixed price contract, fixed amount
Opex Increases
as per the BMUA Agreement or represent relatively small overhead and administrative costs
§ Large supply of companies with the financial strength and operational expertise to manage the System
O&M Contract Terminated
§ Robust replacement and operating cost sensitivities
§ “Safety valves” kick in if pass-through costs or volumes are below certain levels during the rate freeze
period
Liquidity Issues
§ Availability of a $10.0 million revolving credit facility, a $6.5 million rate stablization payment amount, and
$5.0mm of cash on the balance sheet will mitigate any short term liquidity risk
Contractual
§ Significant termination compensation available in the event of a Joint Venture or Authority default
§ In both cases the termination payment must be at least the debt, accrued interest and make-whole
§ BMUA has no significant payment obligations as revenue shortfalls are passed through to rate payers
Concessionaire / BMUA Default under the rate adjustment mechanism
§ Termination payment would be funded by proceeds of a re-concession or a BMUA debt issuance
§ A Deficiency Agreement between the City of Bayonne and the BMUA will be maintained throughout the life
of the Agreement which will allow the BMUA to issue bonds back by the City to pay termination payments
Other
Pension and Labour § No material pension or labor liabilities
§ United operates 100+ systems under contract and also owns and operates utilities in 8 states
Environmental
§ United has never had a contract terminated because of an environmental concern
19
20. We will bring operational best practices
and capital improvements to the BMUA.
20
21. BMUA Agreement – Key Features
United Water’s Solution Provides for:
¢ Operational Best Practices, Life Cycle Cost Analysis,
and Capital Investment to Modernize Facilities and
Systems
¢ O&M Responsibility for a Wind Turbine which has
capacity to sustainably power all water & sewer
system needs
¢ “Base” Capital Improvements – Advanced Metering
Infrastructure (AMI)
¢ “Incremental” Capital improvements – Repair &
Replacement of Underground Infrastructure, Improve
SCADA, Safety & Security
¢ Third Category of Capital Expenditures
(Modifications) related to Unforeseen Events which Meter Data Network Utility IT
trigger a Revenue Adjustment Transmitt
er Unit
Collector
Unit
Control
Computer
Network
(MTU) (DCU) (NCC)
21
22. United Water’s Solution Saves BMUA ~ $35M
UW/KKR Option
Projected Revenue Requirement
Cost - United Water’s Solution
i.e. Without Contract)
Net Upfront Payment (after Debt Defeasance)
(Approx. 6%)
22
23. Projected Rate Increases are Sustainable
The risk of rates being considered too high is Relative Water & Sewer Rates
unlikely for the following reasons: $8
Water Sewer
- Average monthly water and sewer bill for users in
$6
Bayonne is ~$44 and $31, respectively. Water rates are in 5.53
5.31
line with other municipalities and the sewer rates are 4.88 4.73
Rates ($ / 100 cF)
much lower $5 4.29
3.70 3.58
3.50 3.39
- Water rates for United Water New Jersey have grown at a
$3
CAGR of 5.0% since 1970 which is well above the rate
increases that are stipulated in the Concession Agreement
$2
- Water is an essential service but still represents a very low
percentage of total annual expenditures (1.0% of total) $0
n/a
Bayonne Ramsey Jersey City Mahwah North Hudson
Historical Rate Increases in New Jersey Relative Water Expenditure(1)
$1,000 40%
32.9%
% of Average Annual Expenditure
$800 759
CAGR: 5.0% 30%
Avg. Annual Bill
575 575 593
$600
493
20%
16.4%
$400 348 12.7%
241
10%
$200 149
108
2.8% 2.3%
1.0%
$0 0%
1970 1975 1980 1985 1990 1995 2000 2005 2010 Housing Transportation Food Electricity Telephone Water
(1) Bureau of Labor Statistics, Consumer Expenditure Survey
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24. “SOLUTION: Investing in America’s Water”
BMUA Summary and the Next Project Underway
Bayonne, NJ Nassau Co, NY
(Pop. 63,000) (Pop. 1.1 million)
Financial Partners: Financial Partners:
KKR Infrastructure To be selected
& United Water
Operator: Operator:
United Water United Water
Duration: 40 years Duration: 40-50 years
Financial Benefits: Financial Benefits:
¢ Full operation of water & sewer ¢ Full operation of sewer system (30-35% cost
¢ >$100M Capital funds to insure future reduction from County operation)
system upgrades over 40 years ¢ $300-400M Capital funds for next 10 years
¢ $150M upfront payment to remove all debt (then ~25-30M/year)
from Bayonne MUA balance sheet ¢ $750M to eliminate all Sewer Authority &
¢ Tariff (set by City) County debt for sewer system
¢ Tariff (set by County) – increases at CPI level
Nassau will be the largest partnership in the U.S.
24
25. What does the “fiscal cliff”
mean to local government?
“If the fiscal cliff that the Federal Government
faces is to be avoided, there is a potential point
of compromise that could fundamentally change
the relationship between the public and private
sectors in the water industry. The House GOP
has expressed its openness to creating new
revenue for the government, but not by hiking
tax rates on the highest earners, which is the
president’s desire. The two sides have discussed
reducing certain tax incentives, among them the
tax-free status of interest paid to those who
invest in municipal bonds … If the Bayonne
model takes off, it could create a safety net for
municipalities with few options left in a muni
bond market stripped of its prized tax-free
status.”
25
26. Chosen
by
the
CLINTON
GLOBAL
INITIATIVE
as
an
“innova9ve
partnership
which
meets
one
of
the
world’s
most
pressing
challenges”
Selected
by
the
AMERICAN
WATER
SUMMIT
2012
as
the
Partnership
Performance
of
the
Year
which
delivered
“the
most
drama+c
improvement
in
service
and
customer
value
in
the
3
most
recent
years”
Launch Solution Video
26